Question$1[15$ Marks$]$

You have just won a lottery jackpot, and you must choose among the three award options. You

can opt to receive a lump sum today of R$61$ million, to receive $10$ end$-$of$-$year payments of R$9\mathrm{.}7$

million, or to receive $25$ end$-$of$-$year payments of R$6$ million.

Required:

$1\mathrm{.}1.$ If you think he can earn $7\%$ annually, which should he choose? $(4)$

$1\mathrm{.}2.$ If you expect to earn $8\%$ annually, which is the best choice? $(4)$

$1\mathrm{.}3.$ If you expect to earn $10\%$ annually, which option would you recommend? $(4)$

$1\mathrm{.}4.$ Explain how interest rates influence your choice. $(3)$

Question$2[26$ Marks$]$

A dairy company is deciding on its capital budget for the upcoming year. Among the projects

being considered are two machines, A and B$.$ Machine A costs R$50000$ and will produce

expected after$-$tax cash flows of R$30000$ during the next two years. Machine B also costs

R$50000,$ but it will produce after$-$tax cash flows of R$16500$ during the next $4$ years.

Project A has WACC $11\%$ WACC and project B has a $10\%$ WACC.

$2\mathrm{.}1.$ If the projects are independent and not repeatable, which project or projects should the

company accepts? $(6)$

$2\mathrm{.}2.$ If the projects are mutually exclusive but are not repeatable, which project should the

company accept? $(2)$

$2\mathrm{.}3.$ Assume that the projects are mutually exclusive and can be repeated indefinitely. Now

use the replacement chain method to determine the NPV of the project selected.

$(4)$

$2\mathrm{.}4.$ Assume that the projects are mutually exclusive and can be repeated indefinitely.

i$.$ Now use the equivalent annual annuity method to determine the annuity of the

projects. $(4)$

ii$.$ Assuming infinite life for the two projects, calculate the NPV of the projects.

$(3)$

iii. Which projects which is selected and why? $(3)$

$2\mathrm{.}5.$ Could a replacement chain analysis be modified for use where the project$$s cash flows

are different each time it is repeated? Explain $(4)$

MBA$5903$

OCTOBER$/$NOVEMBER $2022$ EXAMINATION

$5$

Question $3[9$ Marks$]$

A print company is considering expanding into the growing laser copier business. The company

estimates that this expansion will cost R$1\mathrm{.}8$ million and will generate a $20-$year stream of

expected net cash flows amounting to R$300000$ per year. The company$$s weighted cost of

capital is $12$ percent.

Required:

$3\mathrm{.}1.$ Calculate the net present value of the laser copier project using the company$$s weighted

cost of capital and the expected cash flows from the project.

$(3)$

$3\mathrm{.}2.$ Using the risk$-$adjusted discount rate approach, management has decided that this

project has substantially more risk than average and has decided that it requires a $20$

percent expected rate of return on projects like this. Recalculate the risk$-$adjusted net

present value of this project. $(3)$

$3\mathrm{.}3.$ Should the print company accept this project? What is the meaning the NPV result?

$(3$