1. Evaluate the project using the NPV criterion [10 marks]
2. Evaluate the project using the ARR criterion[5 marks]

Year Pula 1 2 3 -10 000 000 110 000 000 190 000 000 230 000 000 230 000 000 230 000 000 4 5 6 Assume that all cash flows arise on 31 December each year. You must also assume that annual cash flows are paid across to South Africa on the final day of each year. The cost of the initial investment in plant and equipment at the beginning of January 2022 is P900 000 000. The plant and equipment is depreciated at 5% per annum using the straight line method. An amount of P50 000 000 would be required to finance working capital at the beginning of January 2022. Exchange rates A1 1 January 2022 the spot exchange rate is expected to be R1/P1.1 (that is R1=P1.1). The Pula is expected to weaken against the Rand. This is in line with the differential in the long term interest rates between the two countries over the life of the project. The interest rates are expected to remain stable at 0.5% per annum in South Africa and 1.5% per annum in Botswana for the foreseeable future. Funding the project The initial investment of P950 000 000 will be funded by a rights issue at the beginning of January 2022. The realisable value for the plant and equipment is estimated at P530 000 000. This amount will be repaid in full to South Africa. Investment criteria Criterion 1 T Royal Itd assesses international projects using the NPV criterion. A risk adjusted discount rate of 1296 is used. Criterion 2 The royal requires international projects to generate an accounting rate of return of at least 25% per year. ARR is defined as follows: Average accounting profit before interest and taxes / average annual investment Ignore taxes in your calculations