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Question 2 (10 marks) A government agency in a country is considering funding a large broad band and a wireless project. This will provide
Question 2 (10 marks) A government agency in a country is considering funding a large broad band and a wireless project. This will provide great benefit to the business industry in the country and make more competitive the local industry. The estimated net cash flows for each of the projects occur annually and are shown in the table below. The agency will proceed with the two projects only if it is expected to be profitable on a net present value basis. Year 0 1 2 3 Wireless Broad band -10,000 -2,000 -8,000 5,000 5,000 5,000 8,000 5,000 4 20,000 2,000 Use the net present value criterion to decide whether each of the projects is profitable and which project the company should choose, using a discount-rate of 10% p.a. with annual compounding. (5 marks) Answer: (b) Company ABC Pty Ltd considers a potential project with the following estimated net cash flows ($000's): 0 1 2 14,500 Year Project C -10,000 -3,000 The project would be funded entirely by debt (borrowing) rather than by equity capital. The average borrowing cost for the company for a 2 year project with these risk characteristics is 8% p.a. Calculate the Internal Rate of Return (IRR) for Project C (2 d.p.) and use it to determine whether ABC should proceed with the project. (5 marks) Answer:
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