QUESTION 3
An appraisal of three mutually exclusive projects is being carried out. The cash flow forecasts for the three projects are as follows:
PROJECT
Initial investment, R
Annual Running cost, R
Net Annual receipts, R
Resale value, R
Life, years
A
10 000 000
250 000 first 10 years, 300 000 over next 6 years, then 350 000 over remaining life
280 000 first 9 years, thereafter 300 000
800 000
20
B
12 220 000
200 000 first 12 years, 220 000 over next 8 years, then 280 000 over remaining life
290 000 first 14 years, thereafter 350 000
1200 000
25
C
15 000 000
150 000 first 15 years, 180 000 over next 10 years, then 210 000 over remaining life
300 000 first 17 years, thereafter 380 000
1300 000
30
Using Net Present Value analysis at an interest rate of 12.5 % per annum, determine which project should be recommended.
(Hint: F = P (1+i)$^n$; P = A [ ((1+i)$^n$ – 1) / (i * (1+i)$^n$)] )
[25 marks]
