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Homework answers / question archive / Grandul limited has the option to invest in Project XXX

Grandul limited has the option to invest in Project XXX

Finance

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?

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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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