QUESTION 1 [41 MARKS]
ABC Holdings is considering two projects. The projects are similarin nature and are expected to both operate for four years. Due tounavailability of funds to undertake both of them, only one projectcan be accepted. The cost of capital is 12%.
The following information is available:
| | Net cash flows |
| Project A | Project B |
| N$000 | N$000 |
| Initial Investment | 46000 | 46000 |
| Year 1 | 17000 | 15000 |
| Year 2 | 14000 | 13000 |
| Year 3 | 24000 | 15000 |
| Year 4 | 9000 | 25000 |
| Estimated scrap value at the end of year 4 | 4000 | 4000 |
Depreciation is charged on the straight line basis.
a) Calculate the following for both proposals:
(i) the payback period (round off your answer to one decimalplace)
(ii) the net present value (NPV)
(iii) the return on investments (ROI)
(iv) the residual income (RI)
(v) If the two projects are mutually exclusive, which projectshould be chosen and why?
(b) Determine the sensitivity of Project A to a change in costof capital
(c) Determine the sensitivity of Project B to a change ininitial investment
(d) Assuming that the management of ABC holdings have decided toundertake both projects and the projects can be undertaken in part,how much NPV will they get if they have N$80 000 000 available toinvest.
(e) Explain three non-financial considerations that should betaken into account before a project is chosen.
