QUESTION:

Company Z is considering investing in a Project A, which has an investment outlay of R2,000,000. The after tax cash flows derived from the project are: Year 1 = R500,000, Y2 = R600,000, Y3 = R700,000, Y4 = R800,000, Y5 = R900,000. (Note: In evaluating the project, you will have to use the WACC derived according to the traditional world). The project's IRR is

A. 17.26%

B. 18.03%

C. 19.71%

D. 21.07%

E. 23.64%

FOR CALCULATION QUESTIONS THAT PERTAIN TO COMPANY Z LTD, PLEASE USE THE FOLLOWING: COMPANY Z STATEMENT OF FINANCIAL POSITION: R ASSETS Non-current assets 10 000 000 Current assets 4 000 000 Total Assets 14 000 000

EQUITY & LIABILITIES Equity 5 000 000 Non-current liabilities 7 000 000 Current liabilities 2 000 000 Total Equity & Liabilities 14 000 000

CAPITAL ASSET PRICING MODEL: Cost of Equity (ke): Risk Free Rate (Rf) = 5% Return on the Market (Rm) = 15% Beta of share () = 1.3

CAPITAL STRUCTURE: If Debt: Equity is 30 : 70, ke can be derived from Ke calculation above If Debt: Equity is 50 : 50, ADD 3% to ke derived from a D:E of 30 : 70 If Debt: Equity is 70 : 30, ADD 8% to ke derived from a D:E of 30 : 70 Cost of Debt before tax (kd before tax): Cost of debt before tax = 6% where Debt: Equity is 30:70 Cost of debt before tax = 9% where Debt: Equity is 50:50 Cost of debt before tax = 13% where Debt: Equity is 70:30 Tax rate = 30%

Weighted Average Cost of Capital (WACC) as would be derived from figures shown above: Debt Proportion Kd Before Tax Equity Proportion Ke 30% 6% 70% Use: Risk Free (Rf) Rate = 5%, Return on the Market (Rm) = 15%, Beta () of share = 1.3 50% 9% 50% Add 3% to Ke derived for Equity Proportion at 70% (i.e. *IF Ke = 10% at a D:E of 30:70, then at 50:50, ke = 10% + 3% = 13%) 70% 13% 30% Add 8% to Ke derived for Equity Proportion at 70% (i.e. *IF Ke = 10% at a D:E of 30:70, then at 70:30, ke = 10% + 8% = 18%) * Note: This does NOT mean that the ke derived for 30:70 is 10%. It is for illustrative purposes only. You must derive the ke. Please read the information carefully. It is clear as to what you are required to do. T

HE INVESTMENT DECISION: A project has the following after tax cash flows, Y0 = (2 000 000), Y1 = 500 000, Y2 = 600 000, Y3 = 700 000, Y4 = 800 000, Y5 = 900 000

THE FINANCING DECISION: Company Zs current market value is: R Equity 5 000 000 Debt 7 000 000 Value of Co Z 12 000 000