CA Co limited is a Zambia business evaluating three different investments (A,B and C) one of which
Question:
CA Co limited is a Zambia business evaluating three different investments (A,B and C) one of which is a foreign investment with dollar cash flows.
Project A (foreign project with foreign cash flows
Year | 1 | 2 | 3 | 4 | 5 |
$ | $ | $ | $ | $ | |
Before tax Cashflows | 30,000 | 36,000 | 45,000 | 50,000 | 35,000 |
The initial cost of the project will be $120,000 with a nil scrap value at the end of 5 years. The dollar cost of capital is 8% while the kwacha rate is 10%. The tax in dollars is 20% per year. The kwacha/dollar spot exchange rate is k19.75 to one dollar. There are no capital allowances available on these projects.
Project B
Year | 0 | 1 | 2 | 3 | 4 |
ZMW | ZMW | ZMW | ZMW | ZMW | |
Net Cashflows | (110,000) | 25,000 | 38,000 | 50,000 | 30,000 |
Project c
Year | 0 | 1 | 2 | 3 | 4 |
ZMW | ZMW | ZMW | ZMW | ZMW | |
Net Cashflows | (85,000) | 10,000 | 40,000 | 35,000 | 40,000 |
Project B and Project C are both local projects. These are mutually exclusive investments with a life of four (4) years and zero salvage values. The cost of capital is 10% while the re-investment rate is 12% per year. Cash flows in project B and project C are net of tax. Ignore inflation.
REQUIRED:
a) Calculate the dollar and the kwacha net present value (NPV) of project A and comment on the viability of the project
b) Discuss the challenges associated with evaluating foreign projects.
c) Briefly discuss any TWO advantages of using the NPV method compared to the Internal rate of return (IRR)
d) Determine the modified internal rate of return (MIRR) for BOTH Projects B and Project C and comment on the results recommending the best projects (if any)
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw