Question $2(16$ Marks$)$

A small$-$scale mining company, TD$,$ is evaluating a maintenance contract for its heavy

machinery. One company has offered TD a four$-$year contract for R$100,000$ to be paid in

advance. Another company has offered an eight$-$year contract for R$165,000,$ also to be paid in

advance. TD will be able to save R$34,000$ per year under either contract because its employees

will no longer have to do the work themselves. The company uses a $10$ percent cost of capital

to evaluate potential investments.

Required

$2\mathrm{.}1.$ Using these data, calculate the net present value of the two contracts. $(4)$

$2\mathrm{.}2.$ Can the two net present values be compared? $(3)$

$2\mathrm{.}3.$ Which project should be selected? Use the equivalent annuity $($EAA$)$ method to justify

your answer. $(5)$

$2\mathrm{.}4.$ Which project should be selected? Use the replacement chain method to justify your

answer. $(4)$