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QUESTION THREE [25] Laker Ltd has a choice of two projects to invest...

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Accounting

QUESTION THREE $[25]$

Laker Ltd has a choice of two projects to invest in $.$ The following details relate to these projects:

Project Y

Project Z

Investment required

R $1700 000$

R $1600 000$

Expected economic lifetime

$6$ years

$6$ years

Minimum required rate of return

$12 %$

$12 %$

Net annual cash inflows

$1$ st year

R $400 000$

R $430 000$

$2$ nd year

R $420 000$

R $430 000$

$3$ rd year

R $440 000$

R $430 000$

$4$ th year

R $580 000$

R $430 000$

$5$ th year

R $520 000$

R $430 000$

$6$ th year

R $460 000$

R $430 000$

Required: $3.1$ Use the net present value method to determine which project Laker Ltd should choose. Show all workings $(19)$

$3.2$ Justify why the net present value method $($ NPV $)$ is favoured over the payback period. $(6)$

Present value interest factor of R $1$ per period for n periods, PVIF $($ i $,$ n $)$

$2$

Period

$12 %$

$1$

$0.893$

$2$

$0.797$

$3$

$0.712$

$4$

$0.636$

$5$

$0.567$

$6$

$0.507$

Present value interest factor of an annuity of R $1$ per period for n periods, PVIFA $($ i $,$ n $)$

Period

$12 %$

$1$

$0.893$

$2$

$1.690$

$3$

$2.402$

$4$

$3.037$

$5$

$3.505$

$6$

$4.111$

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