Question $1[10$ Marks$]$

Econint recently bought a company and wants to determine the optimal time to sell it$.$ The

partner in charge of this investment has estimated the after$-$tax cash flows from a sale at

different times to be as follows: R$700000$ if sold one year later; R$1000000$ if sold two years

later; R$1200000$ if sold three years later; and R$1300000$ if sold four years later. The

opportunity cost of capital is $12$ percent.

Required:

Advise on the best time for Econint to sell the company and provide supportive justification for

your answer.

Question $2[20$ Marks$]$

Your company is considering two mutually exclusive projects. Project A has an initial capital

investment of R$1$ billion, and Project B has an initial investment of R$1\mathrm{.}5$ billion.

Project A has an expected life of $5$ years with after$-$tax cash inflows of R$400$ million, each year

for the next $5$ years. Project B has an expected life of $10$ years with after$-$tax cash inflows of

R$350$ million, each year for the next $10$ years. The company$$s WACC for project A is $10\%$ and

$12\%$ for project B$.$

Required:

$2\mathrm{.}1.$ If the projects cannot be repeated, which project should be selected if the company uses

NPV as its criterion for project selection? $(6)$

$2\mathrm{.}2.$ Assume that the projects can be repeated and that there are no anticipated changes in

the cash flows. Use the replacement chain analysis to determine the NPV of the project

selected. Which project should be accepted? $(4)$

$2\mathrm{.}3.$ Make the same assumptions as in part $2\mathrm{.}2.$ Using the equivalent annual annuity $($EAA$)$

method, what is the EAA of the project selected? Assuming NPV for infinite life, which

project should be accepted? $(10)$

MBA$5903$

OCTOBER$/$NOVEMBER $2021$

$5$

Question $3[12$ Marks$]$

You are managing a successful manufacturing company focusing on agricultural products. The

company did not pay a dividend last year and is not expected to do so for the next two years.

Last year the company$$s growth accelerated, and management expects to grow the business

at a rate of $30$ percent for the next five years before growth slows to a more stable rate of $7$

percent. In the third year, management has forecasted a dividend payment of R$1\mathrm{.}20.$ Dividends

will grow with the company thereafter.

The required rate of return for such stocks is $11$ percent.

Required:

$3\mathrm{.}1.$ Calculate the value of the company$$s stock at the end of its rapid growth period $($i$.$e$.,$ at

the end of five years$).(7)$

$3\mathrm{.}2.$ What is the current value of this share? $(5)$