Question $2[20$ Marks$]$

Your company is considering two mutually exclusive projects. Project A has an initial capital

investment of R$1$ billion, and Project B has an initial investment of R$1\mathrm{.}5$ billion.

Project A has an expected life of $5$ years with after$-$tax cash inflows of R$400$ million, each year

for the next $5$ years. Project B has an expected life of $10$ years with after$-$tax cash inflows of

R$350$ million, each year for the next $10$ years. The company$$s WACC for project A is $10\%$ and

$12\%$ for project B$.$

Required:

$2\mathrm{.}1.$ If the projects cannot be repeated, which project should be selected if the company uses

NPV as its criterion for project selection? $(6)$

$2\mathrm{.}2.$ Assume that the projects can be repeated and that there are no anticipated changes in

the cash flows. Use the replacement chain analysis to determine the NPV of the project

selected. Which project should be accepted? $(4)$

$2\mathrm{.}3.$ Make the same assumptions as in part $2\mathrm{.}2.$ Using the equivalent annual annuity $($EAA$)$

method, what is the EAA of the project selected? Assuming NPV for infinite life, which

project should be accepted? $(10)$

MBA$5903$

OCTOBER$/$NOVEMBER $2021$

$5$

Question $3[12$ Marks$]$

You are managing a successful manufacturing company focusing on agricultural products. The

company did not pay a dividend last year and is not expected to do so for the next two years.

Last year the company$$s growth accelerated, and management expects to grow the business

at a rate of $30$ percent for the next five years before growth slows to a more stable rate of $7$

percent. In the third year, management has forecasted a dividend payment of R$1\mathrm{.}20.$ Dividends

will grow with the company thereafter.

The required rate of return for such stocks is $11$ percent.

Required:

$3\mathrm{.}1.$ Calculate the value of the company$$s stock at the end of its rapid growth period $($i$.$e$.,$ at

the end of five years$).(7)$

$3\mathrm{.}2.$ What is the current value of this share? $(5)$

Question $4[12$ Marks$]$

Your company is considering the purchase of new equipment. The equipment costs R$350000,$

and an additional R$110000$ is needed to install it$.$ The equipment will be depreciated straightline to zero over a five$-$year life. The equipment will generate additional annual revenues of

R$265000,$ and it will have annual cash operating expenses of R$83000.$ The equipment will be

sold for R$85000$ after five years. An inventory investment of R$73000$ is required during the life

of the investment. The company is in the $40$ percent tax bracket, and its cost of capital is $10$

percent.

Required:

What is the project NPV$?$