QUESTION 2 [20 marks] Suppose Hagar plc has two alternative uses for a...
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Accounting
QUESTION 2 [20 marks]
Suppose Hagar plc has two alternative uses for a warehouse The company can store toxic waste containers or electronic equipment. Cash flows and risk associated with the two independent investments are given below.
Toxic waste containers
Year
Cash inflows
Certainty equivalents
0
40 000
1.00
1
20 000
0.90
2
16 000
0.80
3
12 000
0.60
4
10 000
0.50
5
10 000
0.40
Cash inflows are discounted at the risk-free rate of 9%.
Electronic equipment
Year
Cash inflows
0
56 000
1
19 000
2
22 500
3
12 750
4
16 000
5
8 000
The risk-free rate is 8% and the risk premium is 2%.
REQUIRED
Calculate the NPV and IRR relating to the toxic waste containers investment. (9 marks)
Calculate the NPV and IRR relating to the electronic equipment investment. (9 marks)
Based on the NPV and IRR calculated in 1.1 and 1.2, which investment would you advise Hagar plc to invest their funds in? Provide a reason for your answer. (2 marks)
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