Freshly Ground Investments have just made an investment of $550 000 in a new Toyota Hilux (with trailer) 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
Year Cash flows
1 220 000
2 200 000
3 120 000
4 110 000
5 50 000
Required:
1. Calculate the payback period and the accounting rate of return.
2. Freshly Ground Investments 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
3. The payback method makes a crucial omission in the calculation, namely the time value of money. Can you complete the above computation using a method that accounts for the time value of money? On the basis of this calculation, should the project be accepted? Explain