QUESTION 5 (30 Marks) Sanchez and Gomez LTD is evaluating a new 3-year project at a cost of R 20 million. The project is expected to result in an increase in revenue of R 15 million in the first year, R 20 million in the second year and R 10 million rand in the third year. The company expects operating costs to be 60% of sales revenue. The company will need to invest R 4 million in working capital at the beginning of the project which is recoverable at the end of the life of the project. The residual or market value of the project at the end of Year 3 is expected to be R 12 million. The required rate of return is 12%. Assuming no taxation: [Round off final answers to the nearest rand 5.1 What is the project's Net Present Value (NPV)? (20) 5.2 What is the project's payback period? 5.3 Based on your calculations above, should the company accept or reject the project? (5) QUESTION 4 (20 Marks) Sanchez LTD issued corporate bonds 3 years ago with a coupon rate of 10% and a par value of R100. The redemption date is 31 December 2010 and the coupon payment occurs on 31 December each year. The current date is 01 January 2005. 4.1 What are the fundamental building blocks of valuation? (10) 4.2 (10) What is the value of each bond issued by Sanchez LTD if the bonds issued by similar firms and with the same term of maturity are currently trading on yields of 7% per year? 07 UD QUESTION 5 (30 Marks) Sanchez and Gomez LTD is evaluating a new 3-year project at a cost of R 20 million. The project is expected to result in an increase in revenue of R 15 million in the first year, R 20 million in the second year and R 10 million rand in the third year. The company expects operating costs to be 60% of sales revenue. The company will need to invest R 4 million in working capital at the beginning of the project which is recoverable at the end of the life of the project. The residual or market value of the project at the end of Year 3 is expected to be R 12 million. The required rate of return is 12%. Assuming no taxation: [Round off final answers to the nearest rand 5.1 What is the project's Net Present Value (NPV)? (20) 5.2 What is the project's payback period? 5.3 Based on your calculations above, should the company accept or reject the project? (5) QUESTION 4 (20 Marks) Sanchez LTD issued corporate bonds 3 years ago with a coupon rate of 10% and a par value of R100. The redemption date is 31 December 2010 and the coupon payment occurs on 31 December each year. The current date is 01 January 2005. 4.1 What are the fundamental building blocks of valuation? (10) 4.2 (10) What is the value of each bond issued by Sanchez LTD if the bonds issued by similar firms and with the same term of maturity are currently trading on yields of 7% per year? 07 UD