Question 4 (10 marks) a) The estimated net cash flows of a company for each of its projects occur annually and are shown in the table below. The company will proceed with a project only if it is expected to be profitable on a net present value basis. 0 2 3 Year Project A Project B -10,000 -8,000 1 -2,000 5,000 5,000 6,000 6,000 8,000 4 18,000 6,000 Use the net present value criterion to decide whether each of the projects is profitable and which project the company should choose, using a discount-rate of 10% p.a. with annual compounding. [5 marks] (b) Company XYZ Pty Ltd considers a potential project with the following estimated net cash flows ($000's): Year 0 1 2 Project C -8,000 -4,000 15,000 The project would be funded entirely by debt (borrowing) rather than by equity capital. The average borrowing cost for the company for a 2 year project with these risk characteristics is 10% p.a. Calculate the Internal Rate of Return (IRR) for Project C (2 d.p.) and use it to determine whether ABC should proceed with the project. [5 marks] Question 5 (5 marks) Assume you receive $60,000 a fixed amount of payment for 5 years. The first payment will be received 6 months after today and the payments will continue semi-annually until the end of the 5th year. You approach a bank to borrow some money which will be secured by the present value of the future income stream. (i) What is the Present Value of the future income stream using a semi-annual compounding interest rate of 5.00%? [3 marks] (ii) What is the Present Value of the future income stream using the same information as for part (i) except that each payment is made at the start of each 6 month period? [2 marks]