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 R 12 per unit. Depreciation is expected to be R 500 000 per year. Annual cash operating costs are as follows:

Variable costs R 225 000

Fixed costs. R 750 000

Rate of return 15 %

Use the information provided above to calculate the following:

1. Net Present Value

2 Accounting Rate of Return on average investment (answer expressed to two decimal places)

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

	1	2	3	4	5
Sales (150,000 × 12)	1,800,000	1,800,000	1,800,000	1,800,000	1,800,000
(-)variable cost	(225,000)	(225,000)	(225,000)	(225,000)	(225,000)
(-)fixed cost	(750,000)	(750,000)	(750,000)	(750,000)	(750,000)
EBITDA	825,000	825,000	825,000	825,000	825,000
(-)depreciation	(500,000)	(500,000)	(500,000)	(500,000)	(500,000)
Net profit	325,000	325,000	325,000	325,000	325,000
(+)depreciation	500,000	500,000	500,000	500,000	500,000
Incremental cashflow	825,000	825,000	825,000	825,000	825,000

1) Using financial calculator to calculate Npv

Inputs:- C0= -2,500,000

C1= 825,000. Frequency= 5

I = 15%

Npv = compute

We get, Npv of the project as R265,527.96

2) Accounting rate of return = net profit / initial investment

= 325,000 / 2,500,000 = 13%

3) Interest rate of return

Using financial calculator to calculate IRR

Inputs: C0 = -2,500,000

C1 = 720,000. Frequency= 5

We get, Irr of the project as 13.53%