Question $3(12$ marks$)$

Consider the following two mutually exclusive projects $($A and B$).$

Whichever project you choose, if any, you require a $10$ percent return on your investment.

$($a$)$ Calculate the payback period for each project. $(4$ marks$)$

$($b$)$ Calculate the net present value $($NPV$)$ of each project $(4$ marks$)$

$($c$)$ Based on your answers in $($a$)$ and $($b$),$ which project will you finally choose? Explain.

$(4$ marks$)$

Question $4(15$ marks$)$

Habibi Corporation is considering a new three$-$year project that requires an initial fixed

investment of $$1,200,000.$ The fixed asset will be depreciated straight$-$line to zero over its

three$-$year tax life, after which time it will be worthless. The project requires an initial

investment in net working capital of $$60,000$ which will be recovered at the end of the project's

life. It is estimated to generate $$750,000,$$$900,000$ and $$1,200,000$ in annual sales in these $3$

years. Besides, it is estimated that the costs will be $$300,000,$$$400,000$ and $$500,000$

respectively in these $3$ years. The tax rate is $25$ percent.

a$.$ Prepare the Pro Forma Income Statements for Habibi Corporation in these $3$ years. $(3$ marks$)$

b$.$ Calculate the projected operating cash flows for Habibi Corporation in these $3$ years. $(3$

marks$)$

c$.$ Copy the following table to your answer sheet and fill in all the blanks. $(6$ marks$)$

d$.$ Suppose the required return on the project is $15$ percent. What is the net present value

$($NPV$)$ of the project? Explain whether the company should accept this project. $(3$ marks$)$