Question $4[12$ Marks$]$

Your company is considering the purchase of new equipment. The equipment costs R$350000,$

and an additional R$110000$ is needed to install it$.$ The equipment will be depreciated straightline to zero over a five$-$year life. The equipment will generate additional annual revenues of

R$265000,$ and it will have annual cash operating expenses of R$83000.$ The equipment will be

sold for R$85000$ after five years. An inventory investment of R$73000$ is required during the life

of the investment. The company is in the $40$ percent tax bracket, and its cost of capital is $10$

percent.

Required:

What is the project NPV$?$

Question $5[20$ Marks$]$

Closs Clothing is evaluating the purchase of computerized clothes design software. The

software is expected to cost R$160000.$ It has a useful life of five years and a zero salvage at

the end of its useful life. Assume the following depreciation patterns for the asset:

MBA$5903$

OCTOBER$/$NOVEMBER $2021$

$6$

Year

Percent

Deductible

$120$

$232$

$319$

$415$

$514$

The company$$s tax rate is $30$ percent, and its cost of capital is $8$ percent. The software is

expected to generate the following cash savings and cash expenses:

Cash Savings Cash Expenses

$1$ R$60000$ R$9000$

$2670007000$

$37200013000$

$4600008000$

$5490005000$

Required:

$5\mathrm{.}1.$ Calculate the net present value. $(8)$

$5\mathrm{.}2.$ Calculate the payback time. $(3)$

$5\mathrm{.}3.$ Calculate the profitability index. $(3)$

$5\mathrm{.}4.$ Discuss the appropriateness of making such investment. $(3)$

$5\mathrm{.}5.$ What other factors should the company consider in evaluating this investment? $(3)$

Question $6[11$ Marks$]$

Exxon is financed with debt, preferred equity, and common equity with market values of R$20$

million, R$10$ million, and R$40$ million, respectively. The betas for the debt, preferred stock, and

common stock are $0\mathrm{.}2,0\mathrm{.}5,$ and $1\mathrm{.}1,$ respectively. If the risk$-$free rate is $3\mathrm{.}72$ percent, the market

risk premium is $5\mathrm{.}71$ percent, and both Exxon$$s average and marginal tax rates are $30$ percent.

Required:

What is the company$$s weighted average cost of capital?

MBA$5903$

OCTOBER$/$NOVEMBER $2021$

$7$

Question $7[15$ Marks$]$

Your company is considering five projects:

Project Initial outlay Profitability index

A $60001\mathrm{.}2$

B $40001\mathrm{.}05$

C $100001\mathrm{.}6$

D $80001\mathrm{.}4$

E $70001\mathrm{.}3$

Project C and D are mutually exclusive, and the company has R$20000$ available for investment.

All projects can only be undertaken once and are divisible.

Required:

$7\mathrm{.}1.$ Which projects should be undertaken to maximise the NPV in the presence of capital

constraints? What is the maximum NPV and initial outlay? $(10)$

$7\mathrm{.}2.$ If all projects can be undertaken, what is the level of NPV and initial outlay? $(5)$