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4 marksCapital Budgeting and Investment Appraisal

CAPE Accounting Unit 2 · 2012 · Paper 2 · Question 3(a)

Ocean Gardens Construction Company considers purchasing a new cement truck costing 200 000, kept for five years with estimated salvage value of 50 000. Annual increase in income and net cash flows over 5 years are provided.

Calculate the payback period for this investment.

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Other parts of this question

  1. 3(b)Calculate the accounting rate of return.[4 marks]
  2. 3(c)Calculate the net present value of this investment if Mr Lee requires a minimum return of 20%, completing the given table.[4 marks]
  3. 3(d)What observations can you make about your findings in the answers (a), (b) and (c)?[5 marks]
  4. 3(e)(i)Explain the term 'variance' as used in standard costing.[5 marks]
  5. 3(e)(ii)List FOUR limitations of variance analysis.[4 marks]
  6. 3(f)Explain the term 'Internal Rate of Return (IRR)'.[5 marks]
  7. 3(g)(i)Other than non-financial considerations, what decision should a company take about a proposed project if the calculated Internal Rate of Return is higher than…[2 marks]
  8. 3(g)(ii)Other than non-financial considerations, what decision should a company take about a proposed project if the calculated Internal Rate of Return is lower than…[2 marks]

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