Question 5 Use the information provided to answer the questions. 5.1 Use the information provided below to calculate the following. Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5. Calculate the Payback Period of Project A (expressed in years, months and days). 5.1.1 5.1.2 5.1.3 5.1.4 Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to two decimal places). Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). Use your answers from question 5.1.3 to recommend the project that should be chosen. Motivate your choice. 5.2 INFORMATION Zeda Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest in one of them. You are given the following projected data: Initial cost Scrap value Depreciation per year Net profit Year 1 Year 2 Year 3 Year 4 Year 5 Net cash flows Year 1 Year 2 Year 3 Year 4 Year 5 Additional information The discount rate used by the company is 12%. Project A R300 000 R40 000 R52 000 R20 000 R30 000 R50 000 R60 000 R10 000 Project B R300 000 Use the information provided below to calculate the Internal Rate of Return (expressed to two decimal places) using interpolation. 0 R60 000 R90 000 R90 000 R90 000 R90 000 R90 000
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Use the information provided to answer the questions.
5.1 Use the information provided below to calculate the following. Where applicable, use the
value
5.1.1 Calculate the Payback Period of Project A (expressed in years, months and days).
5.1.2Calculate the Accounting Rate of
decimal places).
5.1.3 Calculate the
5.1.4 Use your answers from question 5.1.3 to recommend the project that should be chosen. Motivate
your choice.
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The payback period is the duration of time that investment takes to recover the cost of investment or say initial cash outflows. when a company has two investment or project alternatives then the company accepts the one with a lower payback period because the cost of the investment is recovered faster. The payback period is applicable when the initial outflows are the same and the duration of the investment is also the same.
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