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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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