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Question 3 tmalini Trading (Pty) Ltd has been setting aside funds every month for a few years now, with a view to using the saved-up amount for the introduction of a new business unit to expand their enterprise. They've reached their target of saving R1 million, and are now looking at three different projects that they could implement. They have come to you for advice on which one of the three to pursue. Each of the three would cost exactly R1 million to set up, and they have projected the following net cash flows stemming from each project: Project A Project B Project C Year 1 R375,000 R100,000 R800,000 Year 2 R375,000 R200,000 R400,000 Year 3 R375,000 R400,000 R200,000 Year 4 R375,000 R800,000 R100,000 3.1 The directors of Emalini Trading have mentioned that, for them to go ahead with any new projects, their desired payback period is three years or less. Using the payback period as an accept/reject tool, which of the three projects should be accepted, and moved on to the next stage where they will be ranked in terms of preference? (Max. 5 lines) Start writing here: 3.2 Now, for each of the projects that were acceptable in terms of payback period, calculate the NPV and PI figures. The company's cost of capital is 15%. Calculate your answer by filling in the tables below:

Answer 1

See all photos + Add to 4 Search * Edit Create Star => Wrap Text General v Normal Bad Calibri V11 VAA BIU- B.A. X Cut Be Copy - Format Painter Clipboard Paste ===€ Merge & Center - Neutral Insert Delete Format Conditional Format as Good Formatting Table- Styles Σ AutoSum - Αν Z Sort & Clear - Filter Friting Fom Alignment Number Cels J27 > fr A B с D E F G H к L M N o P 0 1 2 PROJECT A PROJECT B PROJECT C 3 YEAR CH YEAR CF CUMULATIVE CF YEAR CF CUMULATIVE CF 4 0-1000000 0 1000000 0-1000000 5 1 375000 11 100000 100000 1 800000 800000 6 2 375000 2 200000 300000 2 400000 1200000 7 3 375000 31400000 700000 3 200000 1400000 8 4 375000 4 800000 1500000 4 100000 1500000 9 10 PAYBACK (YEARS) 2.67 3.60 2.0 11 RANK OF PROJECT 2 3 1 12 13 14 Payback is the time period required to recover the original cost of investment. It is the simplest technique of capital budgeting, Payback method is based on Cash flows. Payback period can be computed using two ways 15 16 A) When Annual cash flows are equal - Investment/ Cash Flow - 1000000/375000 2.67 years (USED IN PROJECT A) 17 18 B) When Annual cash flows are unequal-Cumulative cash flows are used when unequal cash flows are piven. The cash flows are added for various years and cumulative inflows are computed until the sum total of cash info 19 become equal to initial investment. But sometimes it is possible that cumulative cash flows are not exactly matching with the cost of the project at the end of a specific year. So "INTERPOLATION" is used 20 21 In Project 3+ (1000000-700000711500000-100XX) - 3.60 years 22 23 In Project 1+ (1000000-RODODOV11200000-1000000= 2 years 24 25 OneDrive Tanvi This PC Libraries Desktop A DENG Type here to search 22

ee all photos + Add to Search 2 Edit & Create Share Formatting* lace Filter Clipboard F Font Alignment 19 Nurrber Styles Cells Editing 052 X ✓ A B C D E F G H 1 J K L M N 0 P 4. 5 ch Cost of Capital 15% 7 9 0 YEAR CF YEAR CE YEAR 1 0 2 PROJECT A PV -1000000 375000 326086.96 375000 283553.875 375000 246568.59 375000 214407.4671 1 PROJECT B PV - 1000000 100000 86956.52 200000 151228.7 400000 263006.5 800000 457402.6 CF 이 1 2 0 1 2 3 4 PROJECT C PV -1000000 800000 695652.21 400000 302457.5 200000 131503.2 100000 57175.32 31 2 3 4 4 3 5 4 7 NPV BRANK OF PROJECT 70616.89 2 -41405.66 3 186788.21 1 DPI 7 RANK OF PROJECT 1.07062 2 0.95859 3 1.18679 1 2 3 4 NPV is the excess present value of all cash inflows over present value of all cash outflows. NPV-Present value of Cash inflows- Present value of Cash out flows According to NPV, Project is ranked first due to its highest Npv. Project A is ranked second and project Branked Third 3 Profitability Index(Pi) - it is a relative measure which is computed by dividing Present value of caly inflows by present value of Cash outflows. If PD1, accept;Pk1 reject PIEPV of cash inflow/ PV of cash outfluw According to PI, Project C is ranked first: Project A is ranked Secons and Project is ranked third. Type here to search Desktop OneDrive Lanvi This PC Libraries (2) ENG 01:1 22-03-

-6jpg all photos + Add to ♡ Search Edit & Create 4 Share B D E F G H M NPV RANK OF PROJECT N P 70616.89 2 -41405.66 3 186788.21 1 PI RANK OF PROJECT 1.07062 2 0.95859 3 1.18679 1 NPV is the excess present value of all cash inflaws over present value of all.cash outflows. NPV = Present value of Cash inflows- Present value of Cash outflows According to NPV, Project Cis ranked first due to its highest Npv, Project A is ranked second and project Branked Third Profitability Index(PI) - it is a relative measure which is computed by dividing Present value of Cash inflows by present value of Cash outflows. If P>1, accept; Pl<1 reject PI-PV of cash inflow/ PV of cash outflow According to Pl. Project is ranked first; Project A is ranked Secons and Project B is ranked third. Between the three projects, Project should be undertaken because 1) Payback period is less ie 2 years which means the investor will recev Simillion cost of project within 2 years 2) NPV is highest in Project B 3) Pl is highest in Project which means the amount of cast inflows generated over the years is greater than the cost of investing in the project The limitation with Payback method is that it does not take into consideration the time value of ney. It treats all cash flow generated in different yrars at por which can be added together for calculation of cumulative cash ti Sheet1 OneDrive Tani This PC Libraries A do ENG 01:10 22-03-2020 Type here to search Desktop Than