Question1 [41 MARKS]

ABC Holdings is considering two projects. The projects are similar in nature and are expected to both operate for four years. Due to unavailability of funds to undertake both of them, only one project can be accepted. The cost of capital is12%.

The following information is available:

Net cash flows

Project A Project B

$ $

Initial investment 46 000 000 46 000 000

Year 1 17 000 000 15 000 000

Year 2 14 000 000 13 000 000

Year 3 24 000 000 15 000 000

Year 4 9 000 000 25 000 000

Estimated scrap value at the end of year 4 4 000 000 4 000 000

Depreciation is charged on the strait line basis.

Requirements		subtotal	Total
a)	Calculate the following for both proposals
	i) The payback period( round off your answer to one decimal place)	2	2
	ii) The net present value(NPV)	4	6
	iii) The return on investment (ROI)	8	14
	iv) The residual income (RI)	4	18
	v) If the two projects are mutually exclusive, which project should be chosen and why?	4	22
b)	Determine the sensitivity of projects A to a change in cost of capital	6	28
c)	Determine the sensitivity of project B to a change in initial investment	2	30
d)	Assuming that the management of ABC holdings have decided to undertake both projects and the projects can be undertaken in part, how much NPV will they get if they have $80 000 000 available to invest.	5	35
e)	Explain three non-financial considerations that should be taken into account before a project is chosen	6	41