QUESHON 3 [30 MARKS] (a) A textile business is planning an investment programme to overcome a problem of demand exceeding capacity. It is considering two altemative projects involving new machinery. The initial outlays and future cash flows are given below. Project Y machinery is forecast to have a life expectancy of just four years. "m $20,000 $17,000 4 $15,000 $15,000 5 $10,000 {i} Calculate the payback period for both projects. (3 marks) (ii) Explain which project should be selected if payback is the only criterion used and why? (2 marks) (iii) What additional 2 information would help you advise the business on the more suitable project? (2 marks) (b) The following net cash flows relate to two projects: NET CASH FLOWS IN $ 1,000 YEAR 0 1 2 3 4 5 6 PROJECT A -60 20 20 20 20 20 20 PROJECT B -72 45 22 20 '13 '13 13 {i} Calculate the NPVs for each project, assuming 10% cost of capital. {3 marks) (ii) Assuming that the two projects are independent, would you accept them if the cost of capital is 15%? {3 marks) (iii) What is the IRR of each project? (4 marks)