Question

(b) A company is evaluating between two mutually exclusive projects. The required initial investments and the expected net cash flows from the projects are as follows: Project 1 Project 2 0 -$4,000,000 - $4,000,000 1 $1,900,000 $1,100,000 2 $2,255,000 $1,900,000 3 $2,000,000 $2,000,000 The company accepts any project for which the payback period is within 3 years, Which of these projects should be chosen using the payback period as the capital budgeting measure? (3 marks) An Australian multinational company is planning to start a new project in the UK The company estimates that the project requires an initial investment of £160,000. The spot exchange rate at the time of initial investment is A$ 1.60/£. The project will last 3 years and shut down afterwards. The expected net cash flows from the project over the 3 years are £40,000, £65,000, and £80,000 respectively. The expected spot exchange rates for these 3 years are A$1.58/£, A$1.55/£ and A$1.52/E respectively. What is the project's NPV expressed in AS. If the relevant discount rate is 10%? Is the project acceptable based on this calculated NPV? (3 marks) (c)

Answer 1

pay back Period Calculation of Project A Years CFG -40,00,000 19 000 2855000 de 00,000 مدحة سر Comulative cf. -40,00. Ovo 1900 avo 4153000 6155000 Payback period = 1.93 years 24s - 155000 09255000 Project II Year CFO) - 4000000 1100 000 1900 000 20,00 000 Comulative CF -4000,000 I1CO CUO 30,00 000 5900,000 مه در - Payback period = 3 years - 10,000,000 20,oo oro = 2.5 years Project I should be selected becaust Payback period is less. cits

TO Calculation of years CACE o 160000 40000 65000 80000 Net ER 1.60 1.58 1.55 1.52 Net Present value on AS CF (A$) Pvf 10% NPV -256000 1.00 -256000 63200 009091 57455 100750 0.8264 83260 121600 0.7513 91358 Present value - 23927 Project should not be Accepted because NPV is negative. its

Date Calculation of WACC. Cost of Equity ke CAPM & rf & ß (rm-rf 220/tlier( 114.-2.24.) 2 18.2014 Cost of Preference share ke D - L x 100 = 527 Po 40 Cost of kd - debts ko. 20 (1-0.25) + C 1000-880) 10 years 1000+880 xloo ka & 27 xloo = 2.87% 940 Calculation of Wace, Source MKt velul weights Equity 93500000 .1116 Preference I 40,00,000 10.0477 70400000 debte 0.8467 12375000o) Cost. 113.20 5 . 2.87 WACC 1.uz2 0.238 12.413 4.129