Reference no: EM132636240

Question 1: Food Delight Markets is expanding its flagship store to offer hot food, pizza on demand, fish and chips, deserts, a salad bar, soft drinks and coffees. It will take over the rental and use of the shop next door for R300 000 per year, included in the net cash flows below. The cost of the new ovens, warmers, pizza ovens and serving counters is R1 750 000. The net cash flows (represented by sales less costs, such as the chefs, food and rental) are forecast to be as follows:

Years         Net cash flows (R)
1              600,000
2               550,000
3              750,000
4             800,000
5              850,000

Calculate the payback period (in years and months) of the proposed store expansion. Show all steps and calculations and round your final answer to the nearest whole month. answer to the nearest whole month.

Question 2: Using the information provided in the stem of Question 1, calculate the Average Accounting Rate of Return (AAR) of the project. Assume that the equipment will depreciate to zero over the five years, and that the business could be sold for R1 000 000 at that point.