Zulu Ltd have made an investment of R400 000 in a machine. Further details: Expected useful life 5 years (staight line depreciation) Salvage value 120 000 Cost of Capital 10% Expected profit after tax data is as follows (tax rate is 30%) Year 1 Net profit 10 000 Year 2 Net profit 40 000 Year 3 Net profit 70 000 Year 4 Net profit 125 000 Year 5 Net profit 12 000 1. Calculate the payback period 2. Calculate the accounting (average) rate of return 3. Zulu Ltd requires a payback period of no more than 4 years and a return of at least 30%. On the basis of these criteria, should this project be accepted? 4. A financial advisor has informed the accountants of Zulu Ltd, that the above methods ignore the time value of money and has suggested they use the NPV method to assess project acceptance. Assist with the calculations and advise whether the project should be accepted?
Zulu Ltd have made an investment of R400 000 in a machine.
Further details: Expected useful life 5 years (staight line
Year 1 Net profit 10 000 Year 2 Net profit 40 000 Year 3 Net profit 70 000 Year 4 Net profit 125 000 Year 5 Net profit 12 000
1. Calculate the payback period
2. Calculate the accounting (average)
3. Zulu Ltd requires a payback period of no more than 4 years and a return of at least 30%. On the basis of these criteria, should this project be accepted?
4. A financial advisor has informed the accountants of Zulu Ltd, that the above methods ignore the
1. My attempt
1st step; because I've been given net profits instead of cash flows I need to calculate to get to cash flows in order to calculate Payback period and NPV: Investment 400 000-Salvage value 120 000 / 5 years = Depreciation pa 56 000
My cash flows then shows as following: Year 1. -88 200 Year 2. -67 200 Year 3. 65 800 Year 4. 104 300 Year 5. -86 800
How do I get rid of the negative amounts? What the rules when getting negative amounts?
ARR use Net Profits for calculations instead of cash flows, please explain which profit should be used to calculate ARR? Is it the given Net Profit in the question? The Profit before 30% tax or Profit less 30% tax?
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