QUESTION THREE $(20$ MARKS$)$

a$)$ You have a dairy cow that produces K$3,200$ of milk per year for $4$ years $($realized at the end of the year$).$ In the $5$th she becomes infertile so you sell her for Kl$,000.$ What is the present value of the dairy cow assuming a weighted average cost of capital of $9$ percent? $(8$ Marks$)$

b$)$ The Agro feed Ltd has two investment proposal, project A & B which have initial outlay of Kl$0,000$ respectively and a life of $6$ years each. The discount rate or cost of capital is $15\%.$ The expected income streams are shown below.

Year Project A Project B

$1$ KS$000$ KlO$00$

$2$ K$4000$ K$2000$

$3$ K$3000$ K$3000$

$4$ KlO$00$ K$4000$

$5$ KS$00$ KS$000$

a$)$ Calculate the payback period, Net Present Value and Internal Rate of Return of project A and B

b$)$ Advise the farmer on the project to select if:

$($i$)$ The projects are independent

$($ii$)($ii$)$ The projects are mutually exclusive.