QUESTION $1(50$ marks$)$

$1\mathrm{.}1$ The NPV profile gives an indication of how sensitive the project$$s NPV is to a change in the discount rate.What

is the Net Present Value $($NPV$)$ of an investment that costs R$10$ million and generates cash flows of R$8$ million in

Year $1$ and R$6$ million in Year $2,$ assuming the firm's cost of capital is $14\%?$ Provide a comment on your answer.

$(25$ marks$)$

$1\mathrm{.}2$ The net present value method takes into account the time value of money. It involves estimating a project$$s

future cash flows, discounting these cash flows at the company$$s required rate of return $($cost of capital$).$ Given

that Project T$,$ which has a cost of R$80$ million and generates equal cash flows of R$20$ million per year for three

years, given the firm's cost of capital is $18\%?$ Compute the project$$s net present value $($NPV$).$ Comment on your

answer. $(25$ marks$)$