Question 3 Zonta plc has a few projects under consideration for investment. The cost of capital is 12%. Project A Initial cost 29,000 now, and would earn the following cash profits. 8,000 10,000 12,000 6,000 The capital equipment purchased at the start of the project could be resold for 5,000 at the start of the fifth year. 1st year 2nd year 3rd year 4th year Project B An initial outlay of 44,000 will be incurred on capital equipment and 20,000 on working capital. The profits from the project would be as follows. Year Sales Variable costs Contribution Fixed costs Profit 1 75,000 50,000 25,000 10,000 15,000 2 90,000 60,000 30,000 10,000 20,000 3 42,000 28,000 14,000 8,000 6,000 Fixed costs include an annual charge of 4,000 for depreciation. At the end of the third year the working capital investment would be recovered and the equipment would be sold for 5,000. Required: (c) Calculate the NPV of each project, and determine which should be undertaken by the company on financial grounds. (10 marks) (d) Calculate the IRR of Project A, assuming the higher cost of capital is 15%