Reference no: EM133050588

Question - Dectron Ltd is looking to expand its operations by opening a second manufacturing facility. It intends acquiring new plant and equipment for this facility. It is currently considering the following two options that can help increase capacity:

Plant and equipment can be imported at a cost of R840 000. This equipment will generate net cash inflows of R200 000 in the first year and this is expected to increase by 10% for each year for the next four years. The equipment will have a useful life of five years after which it can be sold for R60 000.

Plant and equipment can be purchased locally at a cost of R800 000. This equipment will generate net cash inflows of R300 000 per annum for four years. The equipment will have a useful life of four years after which it will have to be scrapped. It is not expected to realise any cash on its scrapping. The company's cost of capital is 12%. Assets are depreciated on a straight line basis over their useful lives.

Required -

1. Calculate the Payback Period for each option. (Answers must be expressed in years, months and days.)

2. Calculate the Accounting rate of return for each option.