(20 Marks) You recently accepted an assignment with Esprit Lim

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(20 Marks) You recently accepted an assignment with Esprit Limited as a financial consultant. One of your first assignment is the analysis of two proposed capital investment projects. Question One Details of initial investments, after-tax cash flows and average annual profits are represented below: DESCRIPTION Initial Investment Cash Flows Average Annual Profits YEAR AFTER TAX PROJECT A 1.1.2 1 2 3 4 R -100 000 30 000 35 000 28 000 15 000 14 000 Required Calculate the internal rate of return. CASH FLOWS PROJECT B R -100 000 25 000 25 000 25 000
25 000 1.1.1 Which project has a shorter payback period? Motivate your answer by doing the relevant calculations. (8 marks) (answers expressed in years, months and days). Calculate the accounting rate of return for project B. (answer expressed to two decimal places). (4 marks) 17 000 1.1.3 Name two disadvantages of using "payback period" as a technique to evaluate capital investment decisions. (2 marks) 1.2. A machine with a purchase price of R140 000 is estimated to have an inflow of R40 000 per year. The machine will last 5 years and have no residual value at the end of its life. (6 marks)
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