Question $1$: Interest Rates $20$ marks

$1\mathrm{.}1.$ Discuss the meaning of each of the following statements:

a$.$The present value of the future cash flows expected from an investment project is

R$30000000.(2)$

b$.$The net present value $($NPV$)$ of an investment project is R$10000000.(2)$

c$.$A project$$s cost of capital is $10$ percent$.(2)$

$1\mathrm{.}2.$ Companies may need to make the right operational decisions regarding production

capacity and related infrastructure to maximise the options inherent in projects.

Discuss managerial options embedded in investment projects and give some

examples. $(4)$

$1\mathrm{.}3.$ A company may borrow funds to invest in plant and equipment to utilise these in its

business operations and generate a return greater than the cost of borrowing. The

bank will lend funds to the company at rate that is higher than the cost of such funds

to the bank. Although the supply and demand for funds will drive the interest rates, the

South African Reserve Bank can influence these in a short$-$term by setting the repo

rate, the rate at which it lends to commercial banks. Discuss the three main variables

that influence the interest rate.