Question 7

(Marks: 40)

Harry Potter is in the process of choosing the better of two equal risk, mutually exclusive capital expenditure projects. The relevant cash flows for each project are shown in the table below. The firmss cost of capital is 15%.

required

Round of the two decimal places

Q.7.1 Calculate the net present value of Project R. (11)

Q.7.2 Calculate the payback period for Project H.

(11)

Q.7.3

Assuming that Project H has a net present value of R67 818 and that Project R has a payback period of 2.5 years, advise management which project to choose and provide a reason for your answer.

(3)

Q.7.4 In your own words, explain the internal rate of return as a capital budgeting (3) technique.

Q.7.5

Big Bank have approved your study loan of the year of R80 000. The amount is repayable over five years in equal annual instalments of R20 000. The bank has provided you with an interest rate of 7.93% and interest is compounded annually.

Use the format below to prepare the amortisation schedule of the loan over five years.

Payment Principal Interest Balance (15)

Question 7 (Marks: 40) Harry Potter is in the process of choosing the better of two equal risk, mutually exclusive capital expenditure projects. The relevant cash flows for each project are shown in the table below. The firms's cost of capital is 15% Cash flows Initial investment Year 1 Year 2 Expected incremental net cash inflows Project R Project H (100 000) (120 000) 40 000 35 000 40 000 40 000 40 000 50 000 Year 3 Year 4 40 000 58 000 Required: Round to two decimal places