Question 2: Consider the following projects and assume an opportunity cost of capital of 12%. Cash Flows Project A B C a. Calculate the Net Present Value (NPV) of each project. Which is to be preferred and why? Co C -20,000 45,000 -10,000 15,000 -10,000 15,000 (8 marks) b. If there is a capital constraint in place which limits spending to 10,000, which project or projects should be selected? Support your answer with calculations. (5 marks) c. Explain how the following should be treated in a net present value calculation of a project: I. II. d. Respond briefly to the following comments: C 15,000 30,000 25,000 1. sunk costs; 2. depreciation; 3. non-incremental costs (such as allocated head office costs). I. (3 marks) Elizabeth Smith says that she likes the internal rate of return (IRR) because she can use it to rank projects without having to specify a discount rate. (4 marks) d. Respond briefly to the following comments: Elizabeth Smith also says that she likes the payback rule, as long as the minimum payback period is short, the rule makes sure that the company takes no borderline projects. That reduces risk. (4 marks) e. Briefly discuss the limitations of the CAPM as a method for determining the opportunity cost (discount rate) of a project. (6 marks) (Total 30 marks) Elizabeth Smith says that she likes the internal rate of return (IRR) because she can use it to rank projects without having to specify a discount rate. (4 marks) II. |-- Elizabeth Smith also says that she likes the payback rule, as long as the minimum payback period is short, the rule makes sure that the company takes no borderline projects. That reduces risk. (4 marks) e. Briefly discuss the limitations of the CAPM as a method for determining the opportunity cost (discount rate) of a project. (6 marks) (Total 30 marks)