Question
Question 1 The financial manager of Levi Limited is considering borrowing R 840 million at an interest rate of 9% and considering two projects -
Question 1
The financial manager of Levi Limited is considering borrowing R 840 million at an interest rate of 9% and considering two projects - Project A and Project B. The required rate of return for Levi Ltd's equity is 12%, the prime rate is 8% and the inflation rate is 7%. The risk profiles of both projects are approximately the same as the company's current risk profile, therefore, the hurdle rate is also 12%.
| Period | Project A (Rmn) | Project B (Rmn) |
| 0 | -840 | -840 |
| 1 | 35 | 98 |
| 2 | 150 | 113 |
| 3 | 290 | 135 |
| 4 | 220 | 165 |
| 5 | 300 | 180 |
| 6 | 130 | 210 |
| 7 | 180 | 255 |
| 8 | 190 | 180 |
| 9 | 180 | |
| 10 | 120 |
Assuming none of the projects can be replicated, what is the preferred project based on the equivalent annuity? (9 Marks)
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Principles Of Microeconomics
Authors: N Gregory Mankiw
7th Edition
1305081676, 9781305081673
