ETM Co is considering two different projects. Project A is a local project with all cash flows in kwacha while project B is a foreign project with cash flows in US dollars.

Project A:

This involves producing a new product using a new equipment which will be acquired immediately at a cost of K$530,000.$ The asset will last for $4$ years after which the scrap value will be K$40,000.$

Forecast sales units, selling prices, and production costs in money terms due to the new product are as follows;

Year $1234$

Sales units $30,00025,00020,00010,000$

Selling price $($K$/$unit$)14151618$

Variable cost $($K$/$unit$)46610$

The company tax is $30\%$ payable one year in arrears. Capital allowances are available at a $20\%$ reducing balance basis. The after$-$tax money cost of capital is $10\%.$

REQUIRED:

Calculate the net present value $($NPV$)$ of the project and comment on the results. $[18$ marks$]$

Project B:

TC plc has a five$-$year project in the US with cashflows denominated in dollars as follows;

Year $012345$

Cash flows $ $(12,000)2,5004,5004,0005,000.2,000$

The ungeared cost of equity for the dollar cash flows is $8\%$ while the spot exchange rate kwacha to US$ is K$17\mathrm{.}5$ to US$$1.$

REQUIRED:

i$.$ Calculate the base case NPV in dollars and comment on the results.

ii$.$ Assuming that TC plc proposes to use $$9,000$ of $5\%$ debt to finance the project. The debt is repayable in equal annual instalments of $$1,800$ while interest is paid on a reducing balance basis. Company tax is at $30\%$ per year. Calculate the APV of the project in dollars and in kwacha

iii. Briefly explain the steps involved in appraising a foreign project based on the spot exchange rate.