Question $115$ Marks

Your division is considering two projects. The WACC is $10\%,$ and the projects$$ after$-$tax cash flows $($in

millions of rands$)$ would be as follows:

Year Project A Project B

$0-$R$30-$R$30$

$1520$

$21010$

$3158$

$4206$

Required:

$1\mathrm{.}1.$ Calculate the projects$$ NPVs$,$ regular paybacks, and discounted paybacks. $(10)$

$1\mathrm{.}2.$ If the two projects are independent, which project$($s$)$ should be chosen? $(1)$

$1\mathrm{.}3.$ If the two projects are mutually exclusive and the WACC is $10\%,$ which project$($s$)$ should be

chosen? $(1)$

$1\mathrm{.}4.$ Is it possible for conflicts to exist between the NPV and the IRR when independent projects are

being evaluated? Explain your answer. $(2)$

$1\mathrm{.}5.$ Now look at the regular and discounted paybacks. Which project looks better when judged by

the paybacks? $(1)$

Question $215$ Marks

Your company is considering two mutually exclusive projects. Both projects require an initial investment

of R$10000$ and are typical average$-$risk projects for the company. Project A has an expected life of $2$

years with after$-$tax cash inflows of R$6000$ and R$8000$ at the end of Years $1$ and $2,$ respectively. Project

B has an expected life of $4$ years with after$-$tax cash inflows of R$4000$ at the end of each of the next $4$

years. The company$$s WACC is $10\%.$

Required:

$2\mathrm{.}1.$ If the projects cannot be repeated, which project should be selected if NPV is used as a 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.

$(5)$

$2\mathrm{.}3.$ 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?