Calculate the payback period for both projects

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Reference no: EM133061925

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

6 years

Minimum required rate of return

12%

12%

Net annual cash inflows

 

 

1st year

R20,000

R22,000

2nd year

R22,000

R22,000

3rd year

R24,000

R22,000

4th year

R26,000

R22,000

5th year

R23,000

R22,000

6th year

R21,000

R22,000

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.

Reference no: EM133061925

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