Dolby Enterprises has the option to invest in machinery in Projects M and N but finance is only available to invest in one of them. QUESTIONS [20 MARKS] Dolby Enterprises has the option to invest in machinery in Projects M and N but finance is only available to invest in one of them. Project M (R) Project N (R) 450 000 Initial cost 450 000 69 000 69 000 Net Profit: Year 1 Year 2 Year 3 Year 4 Year 5 36 000 75 000 102 000 129 000 81 000 69 000 69 000 69 000
1. Assume that all cash flows take place at the end of the year except the original investment in the project which takes place at the beginning of the project. 2. Project M machinery is expected to be disposed of at the end of year 5 with a scrap value of R60 000. 3. Project N machinery is expected to be disposed of at the end of year 5 with a nil scrap value 4. Depreciation is calculated on a straight-line basis. 5. The discount rate to be used by the company is 12% 5.1 Required: Use the information provided above by Dolby Enterprises to answer the following questions: 5.1.1 Calculate the Payback period of Project N. (Answer must be expressed in years and months.) (3) 5.1.2 Calculate the Accounting Rate of Return (on average investment) of Project M. (Answer must be expressed to two decimal places) (4) 5.1.3 Calculate the Net Present Value of each project. (Round off amounts to the nearest Rand.) (6) 5.1.4 Using your answers from question 5.1.3, which project should be chosen? Why? (2) 5.2 A machine with a purchase price of R418 000 is estimated to eliminate manual operations and save the company R130 000 cash per year. The machine will last for 5 years and have no residual value at the end of its useful life. Required: Calculate the Internal Rate of Return (answer expressed to two decimal places).
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