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Q1 UOB Ltd is considering investing in the following projects. The company has recently embarked on an expansion strategy and is considering two projects. The
Q1 UOB Ltd is considering investing in the following projects. The company has recently embarked on an expansion strategy and is considering two projects. The company is considering raising some capital and has provided you with the following cost of capitals: Equity: 1 million Cost: 10% Debt: 2 million Cost of debt 8% In addition, you are told the corporation tax rate is 30%. They have been presented with two start-up investment opportunities. Project 1 costing 1,000,000, Project 2 costing 1,200,000 Both projects will have a lifespan of 5 years. At the end of the projects project 1 will be sold for 30,000, project 2 for 15,000. The company has a target cost of capital of 10% which it uses to evaluate all new projects. The company has a policy to inflate cash inflows by 5% every year. The expected cash inflows for the projects are as follows: - Years 1 2 3 4 5 Project 1 () 350,000 350,000 350,000 200,000 200,000 Project 2 () 650,000 300,000 200,000 200,000 200,000 Required: Calculate (a) Weighted Average Cost of Capital (b) Payback Period and Net Present Value Project 1 and Project 2 (c) Profitability Index for Project 1 and Project 2 (d) Based on your calculation recommend the best investment. (e) Critically evaluate the Net Present Value method of Investment appraisal
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