Required: a. Determine the net present value of EACH project using a 16 per cent discount rate. (20)

b. Prepare a memorandum for management stating your recommendation. Include supporting calculations. (5)

Question 6 25 MARKS MamaG, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of R40,000, while Project 2 requires an investment of R30,000. Cash revenues and cash costs for each project are shown below. PROJECT 1 YEAR Revenues Variable costs Fixed costs R13 000 R18 000 R35 000 7 000 9 000 12 000 1 000 2 000 3 000 R25 000 12 000 1 000 PROJECT 2 YEAR Revenues Variable costs Fixed costs R22 000 12 000 4 000 R38 000 21 000 3 000 R16 000 8 000 2 000 R9000 5 000 1 000 The company estimates that at the end of the fourth year Project 1 would have a salvage value of R3,000 and Project 2 would have a salvage value of R1,000