7 (4) for the analysis of Lunga's liquidity situation in (1) and (2) above. Clearly state what you would expect these ratios to show. QUESTION 2 20 MARKS Mikes Kitchen is a popular restaurant located in Parktown, Johannesburg. Management would like to improve the facility in order to continue to attract existing customers as well as handle large banquet parties. There are two proposals that are currently under consideration. Project 1 involves a temporary walled structure and umbrellas used for sun protection. Project 2 entails a more permanent structure with a full awning cover for use even in inclement weather. Below is further information about these two proposals: Proposal 1 950 000 50 000 5 years Cost Installation costs Maintenance costs Estimated life span Net cash flows Market value at the end of 5 years Tax depreciation Tax rate Cost of capital Proposal 2 1 150 000 95 000 30 000 5 years 95 000 450 000 15% on a straight line 28% 8% 300 000 300 000 15% on a straight line 28% 8% REQUIRED Marks (1) Forecast the relevant cash flows for project 1 and project 2 12 6 (2) Compute NPV and IRR for Project 1 and Project 2 (3) Which project should be selected and why? 2 4