Use the following information to answer questions $12$ to $15.$

$$ Do the NPV analysis and then answer the following questions.

$$ All values in the options are in R $000000$ and you should choose the nearest, most correct option.

Tarlinx Ltd$.$ is a civil construction company which is planning a significant expansion into construction machinery. Management expects the company to gain significant benefits from doing so$,$ however, there are concerns regarding the impact that the high inflation will have on the projects as well as the significant risk that goes together with the venture. Despite this, management expects it to be lower risk than its current operations. The CFO$$s office has gathered the following relevant information and tasked you to do a NPV and scenario analysis:

The purchase costs of milling machinery required for the project amounted to R$1000$ million while the installation costs amounted to R$100$ million.

Net operating working capital $($NOWC$)$is expected to increase by R$100$m which will be recouped at the end of the project.

Expected cash inflows generated $($in R$000000)$:

Year

$1$

$2$

$3$

$4$

$5$

Cf

$1000$

$1200$

$1500$

$1600$

$1700$

Related variable costs amount to $50\%$ of inflows generated while fixed costs amount to R$100$ million per annum. The project will last for $5$ years, after which the machine will be scrapped and an inflow of R$50$ million is expected.

The machine can be depreciated over $5$ years using the straight line method at the relevant tax rate of $27\%.$

Currently, Tarlinx Ltd$.$ has a beta of $1\mathrm{.}8$ associated with its equity while the construction machinery sector of the stock exchange has an average beta of $1\mathrm{.}1$ which management believes is an appropriate assessment of the risk involved in the project.

The risk free rate is $9\%$ and the market risk premium on the stock exchange is $6\%$ and the company is wholly financed by equity.

All values given above are in real terms. Inflation is expected to be stable at $5\%$ per annum for the foreseeable future.

The CFO$$s office indicated that you should use the real rate approach to determine the NPV of the project.

Question $12$ required:

What is the discount rate that will be used for the analysis?

a$.$

$10\mathrm{.}10\%$

b$.$

$12\mathrm{.}10\%$

c$.$

$15\mathrm{.}60\%$

d$.$

$17\mathrm{.}20\%$

Question $13$

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What is the net cash flow for year one of the project? $($Ie$.$ The final cash flow amount to be used in the NPV calculation for year one.$)$

a$.$

R$400$

b$.$

R$500$

c$.$

R$351$

d$.$

R$389$

Question $14$

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What is the depreciation amount $($the tax deductible amount, not the tax amount$)$ per year?

a$.$

R$200$

b$.$

R$220$

c$.$

R$240$

d$.$

R$320$

Question $15$

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What is the NPV of the project?

a$.$

R$717$

b$.$

R$836$

c$.$

R$1134$

d$.$

R$1564$