Trump Ltd is considering to undertaking a project with the following cash flow patterns.

YEAR 1 2 3 4 5

NCF Sh'000 (60000 (6000) 600 13000 16800

The cost of capital is 12%

The company's current market price per share is Sh.142.50 before the decision to undertake the project is made. The company has 2,000,000 ordinary shares in issue.

Assume that there exist an efficient capital market.

Required;

2. compute the Net Present Value of the project
4. Based on (1) above determine the company's market value per share immediately the decision to undertake the project is made.

b) The initial cash outlay of a project is Sh.100,000 and it can generate cash Sh.40,000, Sh.30,000, Sh.50,000, and Sh.20,000 in year one through year 4. Assume a discount rate of 11.5%. Calculate the project profitability index.

QUESTION 2

A company is considering two mutually exclusive projects requiring an initial cash outlay of Sh.52,000 each and with a useful life of 5 years. The company required rate of return is 10% and the appropriate corporate tax rate is 50%. The projects will be depreciated on a straight line basis. The before depreciation and taxes cash flows expected to be generated by the project are as follows;

YEAR 1 2 3 4 5

Sh.

Project A 20800 20800 20800 20800 20800

Project B 31200 15600 10400 26000 26000

REQUIRED;

Calculate for each project;

2. The payback period
4. the average rate of return
6. the net present value
8. profitability index
10. the internal rate of return
12. which project should be accepted? why?