The initial required investment is R$5000000$ and the shareholders requited $20\%$

return.

The company's weighted average cost of capital is $16\%$ and must be used as the

discount rate, and the net present value $($NPV$)$ and internal rate of return $($IRR$)$

must apply to determine if the expansion project is a viable investment. Ignore

the effects of inflation and taxation.

Required:

$3\mathrm{.}1\mathrm{.}1$ Analyse the information provided and apply the NPV and IRR techniques to

determine whether the company should proceed with the expansion of its fleet.

Use $25\%$ as the alternative cost of capital.

$3\mathrm{.}1\mathrm{.}2$ Evaluate the outcomes of your analysis and recommend to Courier Company's

management whether to proceed with the fleet expansion.

$3\mathrm{.}2$ Courier Company's management considered the recommendations you

presented to them based on the Net Present Value $($NPV$)$ and Internal Rate of

Return $($IRR$)$ calculations. They are however interested in the cost effectiveness

of the long$-$term loan or debentures if taxation recoupment is factored into the

calculations. They requested that you calculate the finance related cash flows

after tax as well as the IRR for the long$-$term loan and the debentures financing.

The long$-$term loan repayment schedule is as follows:

Required:

Note: No wear and tear allowances are relevant to the calculations.

$3\mathrm{.}2\mathrm{.}1$ Use the information provided in the two repayment schedules and expand the

tables to evaluate which of the two repayment schedules represent the lowest

cost of financing for the company. Prepare similar but expanded repayment

schedules and provide reasons for your conclusions.

$3\mathrm{.}2\mathrm{.}2$ Advise Courier Company's management which of the long$-$term$-$loan or

debenture finance options is most cost effective.