You recently went to work for Pasha Company, a supplier of auto repair parts. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project A involves adding a new item to the firm's ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project B involves an add-on to an existing line, and its cash flows would decrease over time (third-year onwards). Both projects have 5-year lives because Pasha is planning to introduce entirely new models after 5 years.

Here are the projects' after-tax cash flows (in thousands of rupees):[12marks]

0 1 2 3 4 5

Project A -PKR60 PKR15 PKR25 PKR33 PKR50 PKR70

Project B -PKR60 PKR20 PKR30 PKR25 PKR20 PKR10

Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm's average project.

a)Assuming Pasha's WACC is 12%, appraise the two projects while answering following requirements:[7marks]

i.What are the payback periods for each of the two projects? [2marks]

ii.What is the NPV value for project A and B? [2marks]

iii.What is the MIRR for project A and B? [2marks]

iv.If the two projects are independent then which of the two projects would you recommend following your answers to part ii and iii? [1mark]

b)Suppose Pasha Company provides you following information about its few key accounts for the year 2018:[5marks]

Key Accounts PKR millions Key Accounts PKR millions

Accounts receivable 1.2 Revenue 8

Inventories 2.0 Cost of sales 50% of sales

Trades Payable 0.5

During the same year, Pasha's working capital performance was summarized through following key ratios:

Key Ratio

Days

DIO/ICP 182.5

DSO/ACP 54.75

DPO/PDP 45.63

i.If Pasha Company could lower its receivables and inventories by 5% each and increase its payables by 5% while keeping revenue and cost of sales unchanged. What would be Pasha's CCC? [3marks]

ii.In the light of your answer to part i, how much cash would be freed up for the

Company?