Problem
A. Evaluate the Internal Rate of Return as an investment appraisal technique.
B. RP Investments Ltd have just made an investment of R550 000 in new equipment.
Additional information:
a. Expected useful life 5 years (straight line depreciation)
b. Salvage value 50 000
c. Cost of Capital 10% after tax
d. Tax rate 30%
Years Cash flows
1 220 000
2 200 000
3 120 000
4 110 000
5 50 000
Task
a. Calculate the payback period and the accounting rate of return.
b. RP Investments Ltd requires a payback period of no more than 3 years and an accounting rate of return of at least 30%. On the basis of these criteria, should this project be accepted? Justify your answer.
c. The payback period method makes a crucial omission in its calculation, namely the time value of money. Complete the above computation using a method that accounts for the time value of money. On the basis of this calculation, should the project be accepted? Justify your answer.