Question

Medico Limited intends investing in a project during March 2021. The project is expected to cost
R2 500 000 with a five-year useful life, and no residual value. The annual volume of production for the project is estimated at 150 000 units, which can be sold for cash at R12 per unit. Depreciation is expected to be R500 000 per year. Annual cash operating costs are as follows:
Variable costs
R225 000
Fixed costs
R750 000
The cost of capital is 15%.
REQUIRED
Use the information provided above to calculate the following:
2.1
Net Present Value

2.2
Accounting Rate of Return on average investment (answer expressed to two decimal places) RATE OF RETURN IS 15% TO CALCULATE NPV AND IRR

2.3
Internal Rate of Return, if the net cash flows are R720 000 per year for five years (answer expressed to two decimal places).

Answer 1

Answer: tax rate is not given in question, so net cash flow arrived without considering tax:

net cash flow = cash inflow(sales) less cash outflow(cash expenses).

depreciation is not considered during calculation of net cash flow because it is a non cash item.

but always considered during calculation of average net profit for accounting rate of return.

note: if net cash flow is same for every year then we can take total of present value of discounted rate and mutiplied by net cash flow of per year to get the present value of net cash flows.