QUESTION 4 (6+4 = 10%) - Use the formula sheet at the end of the question paper to answer the below questions.

a) W Co Ltd is considering investing in a project.

Initial estimates of the returns of the project have revealed the following figures:

PROBABILITY RETURNS

15% 55%

40% 45%

25% 15%

35% 10%

The current risk-free rate of return in the market is 5.5%. W Co board of directors has decided that infrastructure projects are risky in general and as such a risk premium of 5.5% is required. Should W Co invest in this particular project? Why or why not? Explain your answer.

[Answer and show workings here]

b) Calculate the cost of following trade credit terms, where payment is made on the net due date.

(i) 2/15, net 35

[Answer and show workings here]

(ii) 3/10, net 30

[Answer and show workings here]

(iii) 2/10, net 45

[Answer and show workings here]

(iv) 2/15, net 30

[Answer and show workings here]