QUESTION $5(20$ Marks$)$

Study the information provided below and answer the following questions.

INFORMATION

Mpungose Manufacturing $($MM$)$ is considering an opportunity to produce an innovative component which, when fitted into

motor vehicle engines, will enable them to utilise fuel more efficiently. The component can be manufactured using either

process X or process Z$.$

Although this is an entirely new line of business for MM$,$ it is of the opinion that developing either process over a period of

four years and then selling the productions rights at the end of four years to another company may prove lucrative.

The annual after$-$tax cash flows for each process are as follows:

Process X:

Year $01234$

After$-$tax cash flows $($R$)(5700000)1830000172950020790005743500$

Process Z:

Year $01234$

After$-$tax cash flows $($R$)(5700000)96450081900015825008985000$

After assessing the capital market structure and other pertinent data of Mpungose Manufacturing, a senior management

accountant has determined that the company's current cost of capital stands at $12\mathrm{.}75\%.$

REQUIRED:

$5\mathrm{.}1.$Using MM$$s cost of capital as the hurdle rate for the investment, determine the Net Present Value $($NPV$)$ of

Process X and Process Z$,$ showing all calculations and rounding off answers to the nearest Rand.

$(6$ marks$)$

$5\mathrm{.}2.$Calculate the internal rate of return $($IRR$)$ for Process Z$,$ presenting all calculations and rounding off the

answer to two decimal places.

$(5$ marks$)$

$5\mathrm{.}3.$Calculate the modified internal rate of return $($MIRR$)$ for Process Z$,$ displaying all calculations and

rounding off the answer to two decimal places.

$(5$ marks$)$

$5\mathrm{.}4.$Given that the IRR and MIRR of Process X are $27\mathrm{.}30\%$ and $22\mathrm{.}68\%$ respectively, recommend which

process, if any, MM should proceed with and explain your recommendation.

$(4$ marks$)$