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Question 2 2.1 uMgeni municipality is currently experiencing a severe shortage of potable water. The projected cashflow for a modular water treatment plant which the municipality is considering to purchase as an interim measure to improve the water supply situation, is displayed in Table 1-1 below. Table 1-1: Modular water treatment plant projected costs Year 0 1 2 3 4 5 Operational RO R480,000 R480,000 R480,000 R480,000 R480,000 cost Yearly RO R110,000 R110,000 R110,000 R110,000 R110,000 payment as per purchase agreement Final N/A N/A N/A N/A N/A R500,000 payment at end of 5 year period as per purchase agreement (7) Determine the annual equivalent (AE) cost of acquiring and operating the treatment plant by using the following methods: (a) NPV option to calculate the AE in the constant Rand domain. (b) Changing the cash flow to calculate the AE in the constant Rand domain. (7) (c) FV option to calculate the AE in the constant Rand domain. (7) Clearly show all your calculation steps for each of the methods. Use i = 10% and f = 5%. 2.2 Considering that the water treatment plant is estimated to purify and supply 16 kl of water per day and that this water would be sold to municipal consumers at R0,12 per litre with increases linked to the inflation rate (f), would you recommend that the plant be purchased by the municipality or not? Justify your answer. (2)

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