Question 2 New Ple is considering whether to replace existing machineries. This will require an initial investment of 1.2milion. New machineries would have an expected life of six years. At the end of six years, they could be sold for 150.000. Replacement of machineries is expected to generate additional annual revenues of 400,000. The incremental costs are estimated to be 20% of the additional revenues for the first year and 15% of additional annual revenues for the rest of the project New Plc is also considering a request form a large client to manufacture a new product. This will require a new investment of 800,000 in technology. The project will last for six years and is expected to generate annual net cash flows of 200,000. It will not have any residual value at the end of its e. New Pic employs a discount rate of 12% and does not pay any corporation tax Management team has decided to invest a limited capital of 1.5million in new projects. The two projects under consideration are independent and indivisible You are required to: a. Estimate the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PP) techniques and recommend which project(s) the company should undertake. State any assumptions made, when applying these techniques. Show all the calculations. (45 marks) (150-200 words) b. Suggest whether the recommended project(s) is more sensitive to initial investment or discount rate. Support your answer with the relevant estimations (15 marks) (50-100 words) c. Explain how your recommendation would have changed if both projects were divisible. (10 marks) (50 - 100 words) d. Assume that company's discount rate of 12% is given in real terms, but new projects' cash flows are estimated in nominal terms. Assume that the annual inflation rate is expected to be 3%. Suggest whether your recommendation in part (a) will change. (10 marks) (up to 50 words) e. New Plc. is considering a rights issue to raise funds for new investments. Discuss the benefits and limitations of a rights' issue. (20 marks) (150-200 words) Total 100 marks Question 2 New Pic is considering whether to replace existing machineries. This will require an initial investment of 1.2 million. New machineries would have an expected life of six years. At the end of six years, they could be sold for 150,000. Replacement of machineries is expected to generate additional annual revenues of 400,000. The incremental costs are estimated to be 20% of the additional revenues for the first year and 15% of additional annual revenues for the rest of the project New Pic is also considering a request form a large client to manufacture a new product. This will require a new investment of 800,000 in technology. The project will last for six years and is expected to generate annual net cash flows of 200,000. It will not have any residual value at the end of its life. New Pic omploys a discount rate of 12% and does not pay any corporation tax. Management team has decided to invest a limited capital of 1.5million in new projects. The two projects under consideration are independent and indivisible. You are required to: a. Estimate the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PP) techniques and recommend which project(s) the company should undertake. State any assumptions made, when applying these techniques. Show all the calculations (45 marks) (150-200 words) b. Suggest whether the recommended project(s) is more sensitive to initial investment or discount rate. Support your answer with the relevant estimations (15 marks) (50-100 words) c. Explain how your recommendation would have changed if both projects were divisible (10 marks) (50-100 words) d. Assume that company's discount rate of 12% is given in real terms, but new projects' cash flows are estimated in nominal terms. Assume that the annual inflation rate is expected to be 3%. Suggest whether your recommendation in part (a) will change. (10 marks) (up to 50 words) Question 2 New Ple is considering whether to replace existing machineries. This will require an initial investment of 1.2milion. New machineries would have an expected life of six years. At the end of six years, they could be sold for 150.000. Replacement of machineries is expected to generate additional annual revenues of 400,000. The incremental costs are estimated to be 20% of the additional revenues for the first year and 15% of additional annual revenues for the rest of the project New Plc is also considering a request form a large client to manufacture a new product. This will require a new investment of 800,000 in technology. The project will last for six years and is expected to generate annual net cash flows of 200,000. It will not have any residual value at the end of its e. New Pic employs a discount rate of 12% and does not pay any corporation tax Management team has decided to invest a limited capital of 1.5million in new projects. The two projects under consideration are independent and indivisible You are required to: a. Estimate the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PP) techniques and recommend which project(s) the company should undertake. State any assumptions made, when applying these techniques. Show all the calculations. (45 marks) (150-200 words) b. Suggest whether the recommended project(s) is more sensitive to initial investment or discount rate. Support your answer with the relevant estimations (15 marks) (50-100 words) c. Explain how your recommendation would have changed if both projects were divisible. (10 marks) (50 - 100 words) d. Assume that company's discount rate of 12% is given in real terms, but new projects' cash flows are estimated in nominal terms. Assume that the annual inflation rate is expected to be 3%. Suggest whether your recommendation in part (a) will change. (10 marks) (up to 50 words) e. New Plc. is considering a rights issue to raise funds for new investments. Discuss the benefits and limitations of a rights' issue. (20 marks) (150-200 words) Total 100 marks Question 2 New Pic is considering whether to replace existing machineries. This will require an initial investment of 1.2 million. New machineries would have an expected life of six years. At the end of six years, they could be sold for 150,000. Replacement of machineries is expected to generate additional annual revenues of 400,000. The incremental costs are estimated to be 20% of the additional revenues for the first year and 15% of additional annual revenues for the rest of the project New Pic is also considering a request form a large client to manufacture a new product. This will require a new investment of 800,000 in technology. The project will last for six years and is expected to generate annual net cash flows of 200,000. It will not have any residual value at the end of its life. New Pic omploys a discount rate of 12% and does not pay any corporation tax. Management team has decided to invest a limited capital of 1.5million in new projects. The two projects under consideration are independent and indivisible. You are required to: a. Estimate the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PP) techniques and recommend which project(s) the company should undertake. State any assumptions made, when applying these techniques. Show all the calculations (45 marks) (150-200 words) b. Suggest whether the recommended project(s) is more sensitive to initial investment or discount rate. Support your answer with the relevant estimations (15 marks) (50-100 words) c. Explain how your recommendation would have changed if both projects were divisible (10 marks) (50-100 words) d. Assume that company's discount rate of 12% is given in real terms, but new projects' cash flows are estimated in nominal terms. Assume that the annual inflation rate is expected to be 3%. Suggest whether your recommendation in part (a) will change. (10 marks) (up to 50 words)