Cost of plant R3 600 000 Import duty R 900 000 Installation cost R 300 000 Net cash flows Year 1-10 R1 400 000 per annum (excluding residual value) Residual/scrap value R1 200 000 The company uses straight-line depreciation. The cost of capital for projects of similar risk is 18%. 2.1 Calculate the investment’s Accounting Rate of Return (ARR).   Briefly explain if the ARR is acceptable or not based on a target rate of return of 40%.  Assume a payback period of 4 years. Determine the payback period and state if the investment is acceptable or not.  Calculate and comment on the viability of the proposed investment based on the net present value (NPV) method.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

Cost of plant R3 600 000
Import duty R 900 000
Installation cost R 300 000
Net cash flows Year 1-10 R1 400 000 per annum (excluding residual value)
Residual/scrap value R1 200 000
The company uses straight-line depreciation. The cost of capital for projects of similar risk is 18%.

2.1 Calculate the investment’s Accounting Rate of Return (ARR). 

 Briefly explain if the ARR is acceptable or not based on a target rate of return of 40%. 

Assume a payback period of 4 years. Determine the payback period and state if the investment is
acceptable or not. 

Calculate and comment on the viability of the proposed investment based on the net present value
(NPV) method.

Discuss whether the advantages of using the NPV method outweigh the disadvantages

Expert Solution
steps

Step by step

Solved in 4 steps with 2 images

Blurred answer
Knowledge Booster
Derivatives and Hedge Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education