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What is the Accounting Rate of return for System A

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Reference no: EM132774998

Question - Agro Tech Corporation is considering investing in a new IT system for selling to its clients.

The company has identified two new possible systems, which would be suitable for its customers. Only one of the systems can be selected and the directors are looking for guidance on which system would be the best. The company requires a 15% rate of return on projects of this nature.

The installation cost per project will be R100 000 each, while systems can be disposed for R200 000 each after five- years life span.

Cash flows for Agro Tech Corporation: IT System (Rands)

PERIOD 0 1 2 3 4 5

SYSTEM 4 000 000 R1 800 000 R1 700 000 R1 600 000 R1 500 000 R1 400 000

SYSTEM 3 500 000 1 500 000 1 500 000 1 500 000 1 400 000 R1 300 000

Required -

1. What is the payback period in years, months and days for both systems.

2. Based on my calculations in 1.1, which system should Agro Tech Corporation consider? Why?

3. What is the Net Present Value for both systems.

4. What is the Accounting Rate of return for System A.

Reference no: EM132774998

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