Question 5 15 Marks

Steers is evaluating two competing investment projects. Both projects require an investment of R30 million. The company cost of capital is 12 percent for projects of this type. The expected cash flows are as follows:

Project 1

End-of-year 1 R 3 million

End-of-year 2 R 5 million

End-of-year 3 R 8 million

End-of-year 4 R 10 million

End-of-year 5 R 13 million

Total cash flows R 39 million

Project 2

End-of-year 1 R 12 million

End-of-year 2 R 9 million

End-of-year 3 R 7 million

End-of-year 4 R 4 million

End-of-year 5 R 3 million

Total cash flows R 35 million

Required:

5.1. Which of the two projects would you recommend? Why? (10)

5.2. Will your choice be the same, whatever the cost of capital? (5)