Question 3: Net present value calculation using formula (4 marks)
The branch library needs to replace its copier, as the current copier has reached the end of its lease term. One option is to replace the leased copier by buying a copier at a price of R65 112. This will reduce the annual operating cost by R14 900. Use a discount rate of 8 percent, and the discount table on p105 of Burger (2014). What will the NPV be after four years? What will the NPV be after five years?
Question 4: Payback & ARR (Average rate of return or Accounting rate of Return) 4 marks
The old copier mentioned in question 3 can either be replaced by a copier (1) costing R65 112 and lasting five years and costing R7 000 per annum to operate (all operating expenses included). The copier saves R14 900 per annum on the cost of currently leasing a copier. Or (2), it can be replaced by a copier costing R75 112 and costing R4 000 per annum to operate and lasting seven years, also saving R14 900 per annum on the current cost.
What is Payback Period of each option? Which copier should be purchased, using Payback?
What is ARR Percentage for each option? Which copier should be purchased, using ARR?
