QUESTION B-2 [16 MARKS There are two alternative projects for an expansion of a company's product lines: The first option is a high-quality offer that costs $4,000,000. The expected cash inflow to the firm is estimated to be $900,000 per year after depreciation and tax. The life of this project is 12 years. The second option costs $7,000,000 with a life span of 9 years. The cash inflow to the firm from this option is estimated to be S1,600,000 per annum, again after depreciation and tax This company has a cost of capital of 13% a) Calculate the Internal Rate of Retum (IRR), Profitability Index (PI) and Payback period for both options (9 marks) b) Can NPV be used to rank the projects? If not, what should you do? Explain fully which project should be chosen (4 marks) c) What are some of the advantages that are associated with the use of the NPV in analysing projects? (3 marks) QUESTION B-3 121 MARKS Optomics Ltd. is investigating an expansion of its services. After consultation with industry, the following two projects are available for investment: Project A Project B CAPEX / Initial Outlay $10,000,000 $21,000,000 Project life 8 years 7 years Revenue (per year) $6,000,000 $9,000,000 Variable costs $2,000,000 $1,500,000 Operating expense $1,000,000 $2,000,000 Investment in Net Working Capital (Year) $1,500,000 $2,500,000 The company's tax rate is 30% and uses a straight-line depreciation method. There will be no salvage value associated with these projects at the end of their project life. Official Liquidators has a required rate of return of 10% per annum. a) Determine the Free Cash Flows, for each year, to the fimm for both projects. (12 marks) b) Identify which project you recommend the company invest in (5 marks) c) What is meant by incremental cash flows from a capital budgeting perspective? Why should only incremental cash flows be included in the project valuation process? (4 marks)