1.Marks: 10 - You must have the correct answer and a correct explanation to gain the full marks allocated to each part. Part marks will be allocated but you should not expect to get more than half marks if your answer is incorrect. Evaluate two projects 5 marks for each. Be sure to show full explanations. Ambiguous answers and contradictory statements will be penalised.Both Projects must be done in excel.

3.Format: Calculation and brief working or short answer for Problem 1. Calculations, explanations and a short report for Problem 2. (Excel)

4.Word Limit:A few pages (500 words as a very rough guide; mostly calculations)

Answer the two problems below (P1 and P2). Fivemarks each. Part marks will be allocated.

Project 1Calculations must be done in Excel

The financial advisor to PQR Company is evaluating whether to keep company cars for 3, 4, 5 or 6 years. The following information has been gathered:-

A car costs $80,000 and depreciation is 25% pa straight-line.

Cash expenses are $20,000 per year for the first 2 years, $30,000 in year 3, $40,000 in year 4, $50,000 in year 5 and $60,000 in year 6.

The salvage value is expected to be $30,000 after 3 years, $25,000 after 4 years, $20,000 after 5 years and $10,000 after 6 years.

The after tax required rate of return is 10% pa and the tax rate is 30%.

Required

Prepare an analysis to decide whether company cars should be kept for 3, 4, 5 or 6 years before being replaced with new ones.

Project 2Calculations must be done in Excel

Jean Smith, the financial advisor to Creative Manufacturing is evaluating the following new investment in a manufacturing project:-

The project has a useful life of 8 years.

Land costs $10m and is estimated to have a resale value of $13m at the completion of the project.

Buildings cost $5m, with allowable depreciation of 10% pa reducing balance and a salvage value of $1m.

Equipment costs $4m, with allowable depreciation of 30% pa reducing balance and a salvage value of $1.5m. An investment allowance of 20% of the equipment cost is available.

Revenues are expected to be $8m for the first 4 years and $9m for the next 4 years.

Cash expenses are estimated at $4m in year one and rise at 4% pa.

The new product will be charged $400,000 of allocated head office administration costs each year even though head office will not actually incur any extra costs to manage the project.

An amount of $100,000 has been spent on a feasibility study for the new project.

The project is to be partially financed with a loan of $10m to be repaid annually with equal instalments at a rate of 5% pa over 8 years.

Except for initial outlays, assume cash flows occur at the end of each year.

The tax rate is 30% and is payable in the year in which profit is earned.

The after tax required return for the project is 12% pa.

Required

(a)Calculate the NPV.Is the project acceptable? Why or why not?

(b)Conduct a sensitivity analysis showing how sensitive the project is to revenues, the resale value of the land and to the required rate of return. Explain your results.