Question 1 (Sessions 1 and 2) a) An investment of 180,000 is expected to produce an annual net cash flow of 54,973 for the next five years and the required rate of return is 12 per cent i. Determine the net present value (NPV) for this investment and briefly interpret your answer. (4 marks) (2 marks) iii. Determine the net present value (NPV) of an investment project that produces cash flows of 50,000 in year 1, 60,000 in year 2, 70,000 in year 3, 70,000 in year 4, and 50,000 in year 5. The initial investment is again 180,000 and the required rate of return is 12 per cent. (5 marks) b) The Mining Company has been extracting coal from a strip mining site in Central Scotland for the last fourteen years. It is anticipated that that the site will continue to produce an annual net cash flow of 14 million for the next four years. After this period mining will cease and work will start on returning the land to its former state. This will require an expenditure of 6 million per annum for the three years following the end of production. It has been decided to save a constant annual amount for each of the remaining four years of mining to fund the restoration expenditure. Given an interest rate of 7 per cent determine how much needs to be saved per annum to be able to cover the restoration expenses. (Assume all cash flows occur at the end of each year.) (10 marks) c) Highlands Ltd has arranged a loan of 800,000 with a Government Development Agency at an interest rate of 5 per cent. The loan is to be re-paid in six equal instalments at the end of years one to six. i. Determine the annual instalment necessary to repay the loan from the Government ii. Determine the investments payback period and briefly comment on your answer. Development Agency. (5 marks) ii. If Highlands Ltd usually pays an interest rate of 8 per cent on loans from its bank determine the present value of the interest rate subsidy offered on the loan provided by the Government Development Agency. (7 1/3 marks) (TOTAL 33 1/3 MARKS)