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Question 1 1 5 Marks Your division is considering two projects. The WACC is 1 0 % , and the projects after - tax cash

Question 115 Marks
Your division is considering two projects. The WACC is 10%, and the projects after-tax cash flows (in
millions of rands) would be as follows:
Year Project A Project B
0-R30-R30
1520
21010
3158
4206
Required:
1.1. Calculate the projects NPVs, regular paybacks, and discounted paybacks. (10)
1.2. If the two projects are independent, which project(s) should be chosen? (1)
1.3. If the two projects are mutually exclusive and the WACC is 10%, which project(s) should be
chosen? (1)
1.4. Is it possible for conflicts to exist between the NPV and the IRR when independent projects are
being evaluated? Explain your answer. (2)
1.5. Now look at the regular and discounted paybacks. Which project looks better when judged by
the paybacks? (1)
Question 215 Marks
Your company is considering two mutually exclusive projects. Both projects require an initial investment
of R10000 and are typical average-risk projects for the company. Project A has an expected life of 2
years with after-tax cash inflows of R6000 and R8000 at the end of Years 1 and 2, respectively. Project
B has an expected life of 4 years with after-tax cash inflows of R4000 at the end of each of the next 4
years. The companys WACC is 10%.
Required:
2.1. If the projects cannot be repeated, which project should be selected if NPV is used as a criterion
for project selection? (6)
2.2. Assume that the projects can be repeated and that there are no anticipated changes in the cash
flows. Use the replacement chain analysis to determine the NPV of the project selected.
(5)
2.3. Make the same assumptions as in part 2.2. Using the equivalent annual annuity (EAA) method,
what is the EAA of the project selected? (4

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