Reference no: EM133010721

Malda Ltd have just made an investment of R550 000 in a new delivery vehicle. This vehicle will be used for deliveries and generate revenues from such activities.

Further details:

• Expected useful life 5 years (straight line depreciation)
• Salvage value 50 000
• Cost of Capital 10% after tax
• Tax rate 30%

Year      Cash flows
1           220 000
2            200 000
3            120 000
4           110 000
5            50 000

Required:

Problem 1: Calculate the payback period and the accounting rate of return.

Problem 2: Malda Ltd requires a payback period of no more than 3 years and a return of at least 30%. Purely  on the basis of these criteria, should this project be accepted. Explain.

Problem 3: The payback period method makes a crucial omission in the calculation, namely the time value  of money. Complete the above computation using a method that accounts for the time value of money?