Question1 [41 MARKS]
ABC Holdings is considering two projects. The projects aresimilar in nature and are expected to both operate for four years.Due to unavailability of funds to undertake both of them, only oneproject can be accepted. The cost of capital is12%.
The following information is available:
Net cash flows
ProjectA Project B
$ $
Initialinvestment 46 000000 46 000 000
Year1 17 000000 15 000 000
Year2 14 000000 13 000 000
Year3 24 000000 15 000 000
Year4 9 000000 25 000 000
Estimated scrap value at the end of year4 4 000000 4 000 000
Depreciation is charged on the strait line basis.
| Requirements | | subtotal | Total |
| a) | Calculate the following for both proposals | | |
| i) The payback period( round off your answer to one decimalplace) | 2 | 2 |
| ii) The net present value(NPV) | 4 | 6 |
| iii) The return on investment (ROI) | 8 | 14 |
| iv) The residual income (RI) | 4 | 18 |
| v) If the two projects are mutually exclusive, which projectshould be chosen and why? | 4 | 22 |
| b) | Determine the sensitivity of projects A to a change in cost ofcapital | 6 | 28 |
| c) | Determine the sensitivity of project B to a change in initialinvestment | 2 | 30 |
| 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 $80 000 000 available toinvest. | 5 | 35 |
| e) | Explain three non-financial considerations that should be takeninto account before a project is chosen | 6 | 41 |
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