FINANCIAL MANAGEMENT

Question 1: (Capital Budgeting) - 18 marks Cherry is thinking of importing prawns to sell to the hotels in and around Cape Town She estimates that this venture will require an initial outlay of R500 000 to buy a refrigerated storage unit that can be depreciated on a straight line basis to a salvage value of R50 000 in ten years. In addition, Cherry estimates that she will need R60 000 in working capital during the ten years of the project. Annual sales are estimated to be R200 000, and annual expenses, R40 000. Cherry estimates that the marginal tax rate will be 30% during the project's lifetime. a. What is the initial outlay associated with starting this prawns-importing business? (2 marks) b. What is the annual cash flow from operations? (4 marks) c. What will be the terminal cash flow in year 10? (3 marks) d. If Cherry requires a 16% rate of return to make this investment, what is the project's net present value (NPV)? What is the profitability Index? (6 marks) e. What is the project's internal rate of return (IRR)