1 ASSESSMENT QUESTIONS

QUESTION 1 Existing assetNew asset Carry value = 600,000 Selling price = 280,000 Remaining life = 3 years Depreciation = 100,000 p.a EBDIT = 200,000 Purchase price = 950,000 Useful life = 4 years Depreciation = 160,000 p.a Resale value after 4 years = 0 Savings on the new asset = 600,000 p.a 2

QUESTION 1(cont.)  The firm is considering a replacement of the old asset with a new one. If the tax rate = 30 % and the required return rate is 1 6% : 1. Calculate the Initial investment and the operational cash flows of the two assets. 2. Should the firm accept or reject the projects? 3. Is this an example of a mutually exclusive or independent investment? 3

QUESTION 2  For the same investment, the NPV will be positive if the IRR is less than the cost of capital (TRUE/FALSE?)  Is it possible for an investment to have a short Pb, a negative NPV and a positive IRR? 4

QUESTION 3 Project AProject B  Initial inv. = R400,406  Expected cash flows = R140,000  Cost of capital = 10%  Life = 5 years  Initial inv. = R15,000  Expected cash flows = R500,000  Cost of capital = 10%  Life = 5 years 5

QUESTION 3 (cont.)  A company is in a process of capital budgeting. Identify which project(s) should be selected according to the accept/reject approach 6

QUESTION 4 GAUTRAINBROLAZ PROJECTS  I =850,000  Cf = 350, , , , , ,000  I = 700,000  Cf = 280, , ,000 7

QUESTION 4(cont.)  If the required rate is 10% and projects are mutually exclusive: advise the board of directors in which project to invest. 8

QUESTION 5  Is there a difference between the IRR, RADR and cost of capital? 9