CASE STUDY FINANCIALVIABILITY INDICATORS

Kulula Ltd has been incorporated asan investment advisory company. The company sources for consultingservices in investment appraisal and company valuation. You haverecently joined the company as an investment analyst. You have beenassigned to conduct an investment appraisal of two projects that aclient is considering investing in. The two projects are tomatogrowing using drip irrigation and the second project is keepinglayers for egg production. The initial investment required for eachproject is ZMW 15,000,000 to be invested in plant and machinery.The two projects are mutually exclusive meaning that only one canbe undertaken and not both.

The client has indicated that theycan only accept an investment that meets at leastthe following conditions:

Payback period of not more than 2 years.

Internal rate of return greater than 50%

Details of the project cash flowsand other information are as follows:

Cash flows:

Project	Tomato Growing	Project	Chicken Layers
Year	ZMW'000	Year	ZMW'000
Outlay                  Year 0	(15,000)	Outlay                  Year 0	(15,000)
1	6,000	1	6,000
2	5,000	2	9,000
3	11,000	3	12,000
4	15,000	4	15,000
5	20,000	5	9,000

DepreciationPolicy

The depreciation policy for theplant and machinery is straight line over 5 years with no residualvalue.

Cost of Capital

The weighted average cost of capitalis 25%.

Required:

Using MicrosoftExcel, you are required to:

Calculate the following financial viability indicatorsfor each project:

a) Normal payback period		10 marks
b) Dynamic payback period		10 marks
c) Net Present		10 marks
d) Profitability index or Net PresentValue Ratio		5 marks
e) Internal Rate of return		10 marks
f) Accounting rate of return		10 marks

Prepare a report to the client with a recommendation asto which of the two projects you recommend that the clientundertakes with justification.       15marks

Total marks = 70 marks