Question 1 (23 Marks): The directors of company ABCD Ltd is planning to invest in a new project that will lasts for five years. Following a preliminary analysis on the market, the accountant of the firm has made the following forecast: Sales Volume (units) per year 125,000 Rs Selling price per unit (current price levels) 575 Variable costs per unit (current price levels) 450 Incremental fixed costs (current price levels) 1,800,000 per annum Cost of machine 15,000,000 Scrap value of machine at end of the project (constant price terms) Inflation rate 5,000,000 7.5% The company nominal cost of capital is 15%. Required: (a) Calculate the NPV (ignored taxation). (b) Calculate the sensitivity of the project in relation to: (i) (ii) Sales Volume Variable costs [ 5 Marks] [10 Marks] (c) Discuss your findings of section (a) and (b) above and advise whether the investment proposal is financially acceptable. [ 3 Marks (d) Discuss why it is important to take into consideration risk and uncertainty while appraising a project. [5 Marks] Question 2 (27 Marks): A portfolio consists of three securities Prime, Pals and Son with the following parameters: Prime Pals Son 15 9 25 10 12 14 Expected return (%) Standard deviation (%) Correlation coefficnet (Cor.): Prime & Pals +0.18 Pals & Son -0.24 Prime & Son -0.35 An investor can either invest in Portfolio 1 or Portfolio 2 in the proportion given below. Portfolio proportions (%) Prime Pals Son Portfolio: 1 2 30 50 20 70 10 20 Required: 2 (a) Calculate the expected return and standard deviation for each of the two portfolios (2 Decimal Places). [21 Marks] (b) Explain the diversification effect and the relationship between correlation of assets. [ 6 Marks]