Question
QUESTION 2 [20 marks] Suppose Hagar plc has two alternative uses for a warehouse The company can store toxic waste containers or electronic equipment. Cash
QUESTION 2 [20 marks]
Suppose Hagar plc has two alternative uses for a warehouse The company can store toxic waste containers or electronic equipment. Cash flows and risk associated with the two independent investments are given below.
Toxic waste containers
| Year | Cash inflows | Certainty equivalents |
| 0 | 40 000 | 1.00 |
| 1 | 20 000 | 0.90 |
| 2 | 16 000 | 0.80 |
| 3 | 12 000 | 0.60 |
| 4 | 10 000 | 0.50 |
| 5 | 10 000 | 0.40 |
Cash inflows are discounted at the risk-free rate of 9%.
Electronic equipment
| Year | Cash inflows |
| 0 | 56 000 |
| 1 | 19 000 |
| 2 | 22 500 |
| 3 | 12 750 |
| 4 | 16 000 |
| 5 | 8 000 |
The risk-free rate is 8% and the risk premium is 2%.
REQUIRED
- Calculate the NPV and IRR relating to the toxic waste containers investment. (9 marks)
- Calculate the NPV and IRR relating to the electronic equipment investment. (9 marks)
- Based on the NPV and IRR calculated in 1.1 and 1.2, which investment would you advise Hagar plc to invest their funds in? Provide a reason for your answer. (2 marks)
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