Question 3 Moogle Limited has had a windfall gain of 35 million, and the finance director wants to use this to make the following one-off investment in project Abel: Abel: Investment of 35 million would return a total cash flow of 39 million after one year - i.e. a cash profit of 4 million. An alternative prohject is Babel, and the managing director believes that the firm should invest in Babel instead of Abel, to achieve its objective of profit maximisation: Babel: Investment of 35 million would return a total cash flow of 43 million after four years - i.e. a cash profit of 8 million. Since Babel is offering double the profit, the company's managing director wants to invest in Babel rather than Abel. If the company did not choose either of these investments, the maximum rate of return that could be earned by investing the amount elsewhere at the same risk would be 4% per annum. The firm's chairman says that, if profit maximisation is the objective, the firm should invest in project Cabel, which will also generate double the profit as Abel, but in only one year instead of three years: Cabel: Investment of 35 million would return a total cash flow of 43 million after one year - i.e. a cash profit of 8 million (double the profit of Abel). The Cabel project has a 25% chance of success and a 75% chance of failure - unlike project Abel for which there is a 75% probability that the expected cash flow would materialise and a 25% probability that the investment would fail and return a cash flow of zero. Required: (a) Calculate the net present value of the Abel and Babel investments, and state which of them should be preferred on this basis. (3 marks) (b) Abel and Cabel are both one-year investments, but Cabel offers double the cash profit of Abel. Providing appropriate calculations, discuss the relative attractiveness of the extra cash profit offered by Cabel. (10 marks) (c) Discuss the problems involved in using profit maximisation as the goal of a firm (where relevant, use the above examples of Abel, Babel and Cabel to illustrate your points). How does the goal of maximisation of shareholder wealth deal with those problems? (12 marks)