Question 1: You are the financial manager of an organisation and are planning to invest 20,000 on a new piece of machinery. This machinery will have a useful economic life of 5 years and the cash flows associated with it are expected to be 4,300 annually. The discount rate is 2% (for part b).

Required

a.Calculate the IRR of the project

b.If there is a 18% WDA for the above investment and the corporate Tax Rate is 20%, calculate the NPV of the project at the end of the 5^th year.

Question 2: You are managing an equal-weighted portfolio of stocks (A&B) on behalf of your company's treasury. Assume that stock A and stock B are two risky assets. C is a risk-free asset. The details of these stocks are below:

Stock A

Stock B

C(Risk-free asset r_f)

Average return

7.00%

15.00%

2.00%

Variance of return

0.0064

0.0196

Sigma of return

8.00%

14.00%

Covariance of returns

0.0011

Required

Using the information in the above stated table calculate the following:

a.Expected market portfolio return, E (RM) and the market excess return.

b.The Sharpe ratio

Question 3:

a)Explain the role of inflation in cash flows. Focus specifically on the impact of inflation on the cash flows of a project investment.

b)Discuss the impact of taxation and the impact of inflation in the calculation of the cost of capital.