Grandul limited has the option to invest in Project XXX. The following is available on the project: Project XXX

Question

Grandul limited has the option to invest in Project XXX. The following is available on the project: Project XXX Investment R280 000 Scrap value NIL Expected life 5years Cost of capital 12% Expected after tax profits and cash flow Profits Cash flows End of: Rand Rand Year 1 23 000 79 000 Year 2. 26 000 82 000 Year 3 40 000 96 000 Year 4 43 000 99 000 Year 5 14 000 70 000 Required: 1. Calculate the accounting rate of return. (two decimal places) 2. Calculate the payback period. (in years, months and days) 3. If the payback cut off is three years, should the project be chosen? Why? 4. Calculate the net present value of the project. (Round off amounts to the nearest Rand.) 5. Should the project be accepted on basis of NPV? /Why?

Help In Homework · Accepted Answer

1). Accounting rate of return (ARR) = 10.43% 2). Payback period = 3.23 years 3). Since, the payback period is higher than the required payback period (3 years). So, the project should not be chosen. 4). Net present value (NPV) = $26,872.69 Or $26,873 5). Since, the NPV is positive. So, the project should be accepted. 1). Computation of the accounting rate of return (ARR):- Average annual profit = ($23,000 + $26,000 + $40,000 + $43,000 + $14,000) / 5 = $146,000 / 5 = $29,200 ARR = Average annual profits / Average investment = $29,200 / $280,000 = 10.43%

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Grandul limited has the option to invest in Project XXX

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