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2 25 MARKS The directors of Ori Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new
2 25 MARKS The directors of Ori Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data is available. Project 1 Project 2 Initial investments R110 000 R70 000 Expected annual operating cash flow Year 1 R60 000 R36 000 Year 2 R30 000 R16 000 Year 3 R40 000 R28 000 Estimated residual value of project at year end of year R8 000 R5 000 The business has an estimated weighted average cost of capital (WACC) of 12%. The projects depreciate for accounting purposes over their useful lives on straight line basis (this depreciation has already been accounted for in the above operating cash flows). Neither project would increase the working capital of the business. Additional information: Ignore taxation. The business has sufficient funds to meet all capital expenditure requirements. REQUIRED Calculate for each project: (a) i. The net present value (NPV). (b) ii. The discounted payback period. Calculate the Internal Rate of Return (IRR). If the minimum rate of return is 15 %, suggest with reason whether you should accept the project or not. MARKS
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