Question
QUESTION TWO Paul was recently appointed to the post of investment manager of Masada limited, a quoted company. The company has raised sh. 8,000,000 through
QUESTION TWO
Paul was recently appointed to the post of investment manager of Masada limited, a quoted company. The company has raised sh. 8,000,000 through a right issue.
Paul has a task of evaluating two mutually exclusive projects with unequal economic lives. Project x has 7 years and project y has 4 years of economic life. Both projects are expected to have zero salvage value. Their expected cash flows are as follows:
Project Year 1 | x cash flows (sh) 2,000,000 | y cash flows (sh) 4,000,000 |
2 | 2,200,000 | 3,000,000 |
3 | 2,080,000 | 4,800,000 |
4 | 2,240,000 | 800,000 |
5 | 2,760,000 | - |
6 | 3,200,000 | - |
7 | 3,600,000 | - |
The cost of equity of the firm is 20% Required:
a) the net present value of each project (7mks)
b) the internal rate of return (IRR) of the projects (rediscount cash flows at 24% for project X and 25% FOR PROJECT y (11Marks)
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