Question 7 22 Marks

ABS evaluates two projects that have similar risk characteristics; their cost of capital is 10 percent.

Project A

Now -R 2 000 000

End-of-year 1 R 200 000

End-of-year 2 R 1 200 000

End-of-year 3 R 1 700 000

Project B

Now -R 2 000 000

End-of-year 1 R 1 400 000

End-of-year 2 R 1 000 000

End-of-year 3 R 400 000

Required:

7.1. Calculate the net present value (NPV) of each project. According to the NPV rule, which project should be accepted if they are independent? What if they are mutually exclusive? (10)

7.2. Calculate the payback period and the discounted payback period of each project. If two projects are mutually exclusive, which project should be accepted? (6)

7.3. Calculate the internal rate of return of each project. Which project should be accepted if they are independent, and which project should be accepted if they are mutually exclusive? (6