Question$1[15$ Marks$]$

You have just won a lottery jackpot, and you must choose among the three award options. You can opt to receive a lump sum today of R$61$ million, to receive $10$ end$-$of$-$year payments of R$9\mathrm{.}7$ million, or to receive $25$ end$-$of$-$year payments of R$6$ million.

Required:

$1\mathrm{.}1.$ If you think he can earn $7\%$ annually, which should he choose? $(4)$

$1\mathrm{.}2.$ If you expect to earn $8\%$ annually, which is the best choice? $(4)$

$1\mathrm{.}3.$ If you expect to earn $10\%$ annually, which option would you recommend? $(4)$

$1\mathrm{.}4.$ Explain how interest rates influence your choice. $(3)$

Question$2[26$ Marks$]$

A dairy company is deciding on its capital budget for the upcoming year. Among the projects being considered are two machines, A and B$.$ Machine A costs R$50000$ and will produce expected after$-$tax cash flows of R$30000$ during the next two years. Machine B also costs R$50000,$ but it will produce after$-$tax cash flows of R$16500$ during the next $4$ years.

Project A has WACC $11\%$ WACC and project B has a $10\%$ WACC.

$2\mathrm{.}1.$ If the projects are independent and not repeatable, which project or projects should the company accepts? $(6)$

$2\mathrm{.}2.$ If the projects are mutually exclusive but are not repeatable, which project should the company accept? $(2)$

$2\mathrm{.}3.$ Assume that the projects are mutually exclusive and can be repeated indefinitely. Now use the replacement chain method to determine the NPV of the project selected. $(4)$

$2\mathrm{.}4.$ Assume that the projects are mutually exclusive and can be repeated indefinitely.

i$.$ Now use the equivalent annual annuity method to determine the annuity of the projects. $(4)$

ii$.$ Assuming infinite life for the two projects, calculate the NPV of the projects.

$(3)$

iii. Which projects which is selected and why? $(3)$

$2\mathrm{.}5.$ Could a replacement chain analysis be modified for use where the project$$s cash flows are different each time it is repeated? Explain $(4)$