Question 3 (44 marks) Courier Company (Pty) Ltd's management requested an estimate of the anticipated cash flows for the next five years based on the extension of its fleet. The project team provided the following net cash flow analysis for the next five years. Years Cash Flows (Rand) 1 2 200 000 2 2 000 000 3 1 900 000 4 1 500 000 5 1 000 000 The initial required investment is R5 000 000 and the shareholders requited 20% return. The company's weighted average cost of capital is 16% and must be used as the discount rate, and the net present value (NPV) and internal rate of return (IRR) must apply to determine if the expansion project is a viable investment. Ignore the effects of inflation and taxation. Required: 3.1.1 Analyse the information provided and apply the NPV and IRR techniques to determine whether the company should proceed with the expansion of its fleet. Use 25% as the alternative cost of capital. (20) 3.1.2 Evaluate the outcomes of your analysis and recommend to Courier Company's management whether to proceed with the fleet expansion. (5) 3.2 Courier Company's management considered the recommendations you presented to them based on the Net Present Value (NPV) and Internal Rate of Return (IRR) calculations. They are however interested in the cost effectiveness of the long-term loan or debentures if taxation recoupment is factored into the calculations. They requested that you calculate the finance related cash flows after tax as well as the IRR for the long-term loan and the debentures financing. The long-term loan repayment schedule is as follows: Period Repayme nt 1 (582 98 0) 2 (582 98 0) 3 (582 98 4 (582 98 5 (582 98 6 7 (582 98 (582 98 0) 0) 0) 0) 0) Annual 350 000 317 383 Interest 280 199 237 809 189 485 134 396 71 594 The debentures repayment schedule is as folloWS. Period 1 2 3 4 5 6 7 Repaym (1 2380 ent 63) (1 238 0 (1 238 0 (1 238 0 (1 238 0 (1 238 0 (1 238 0 63) Annual Interest 63) 1 076 63) 1 248 63) 1 448 63) 800 000 928 000 480 717 511 1 680 273 63) 1 949 117 Required: Note: No wear and tear allowances are relevant to the calculations. 3.2.1 3.2.2 Use the information provided in the two repayment schedules and expand the tables to evaluate which of the two repayment schedules represent the lowest cost of financing for the company. Prepare similar but expanded repayment schedules and provide reasons for your conclusions. (16) Advise Courier Company's management which of the long-term-loan or (3) debenture finance options is most cost effective.