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Question - Elmarie Ltd has a choice of two projects to invest in. The following details relate to these projects:
Project A
Project Z
Investment required
R85,000
R80,000
Expected economic lifetime
6 years
Minimum required rate of return
12%
Net annual cash inflows
1st year
R20,000
R22,000
2nd year
3rd year
R24,000
4th year
R26,000
5th year
R23,000
6th year
R21,000
Required -
1. Use the Net Present Value (NPV) method to determine which project Elmarie Ltd should choose.
2. Outline the merits of using the NPV method.
3. Calculate the Payback Period for both projects and discuss an advantage of using this method.
4. State a disadvantage of using the Accounting Rate of Return Method.
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