The information below is for a firm that seeks to invest in any of the two projects namely Project L and S with an initial investment of K100,000

Here are the projects net cash flows (in thousands of kwachas):

Year 0 1 2 3

Project L -100,000 10,000 60,000 80,000

Project S -100,000 70,000 50,000 20,000

Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. The Chief Financial Officer (CFO) also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firms average project. The cost of capital is 10%. You must determine whether one or both of the projects should be accepted.

(a) What is capital budgeting? [4]

(b) Calculate the projects NPV for project L and S. State which project should be selected if the projects are:

i) independent

ii) Exclusive [8]

(c) Calculate the payback period for project L and S. State which project should be selected if the projects are :

i) independent

ii) Exclusive