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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 Marks
Your division is considering two projects. The WACC is and the projects aftertax cash flows in
millions of rands would be as follows:
Year Project A Project B
RR
Required:
Calculate the projects NPVs regular paybacks, and discounted paybacks.
If the two projects are independent, which projects should be chosen?
If the two projects are mutually exclusive and the WACC is which projects should be
chosen?
Is it possible for conflicts to exist between the NPV and the IRR when independent projects are
being evaluated? Explain your answer.
Now look at the regular and discounted paybacks. Which project looks better when judged by
the paybacks?
Question Marks
Your company is considering two mutually exclusive projects. Both projects require an initial investment
of R and are typical averagerisk projects for the company. Project A has an expected life of
years with aftertax cash inflows of R and R at the end of Years and respectively. Project
B has an expected life of years with aftertax cash inflows of R at the end of each of the next
years. The companys WACC is
Required:
If the projects cannot be repeated, which project should be selected if NPV is used as a criterion
for project selection?
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.
Make the same assumptions as in part Using the equivalent annual annuity EAA method,
what is the EAA of the project selected?
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