Question1 [41 MARKS]

ABC Holdings is considering two projects. The projects aresimilar in nature and are expected to both operate for four years.Due to unavailability of funds to undertake both of them, only oneproject can be accepted. The cost of capital is12%.

The following information is available:

                                                                                                                          Net cash flows

                                                                                                                     ProjectA                      Project B

                                                                                                                          $                                  $

Initialinvestment                                                                                              46 000000                    46 000 000

Year1                                                                                                             17 000000                    15 000 000

Year2                                                                                                              14 000000                    13 000 000

Year3                                                                                                               24 000000                    15 000 000

Year4                                                                                                                 9 000000                     25 000 000

Estimated scrap value at the end of year4                                                              4 000000                       4 000 000

Depreciation is charged on the strait line basis.

Requirements		subtotal	Total
a)	Calculate the following for both proposals
	i) The payback period( round off your answer to one decimalplace)	2	2
	ii) The net present value(NPV)	4	6
	iii) The return on investment (ROI)	8	14
	iv) The residual income (RI)	4	18
	v) If the two projects are mutually exclusive, which projectshould be chosen and why?	4	22
b)	Determine the sensitivity of projects A to a change in cost ofcapital	6	28
c)	Determine the sensitivity of project B to a change in initialinvestment	2	30
d)	Assuming that the management of ABC holdings have decided toundertake both projects and the projects can be undertaken in part,how much NPV will they get if they have $80 000 000 available toinvest.	5	35
e)	Explain three non-financial considerations that should be takeninto account before a project is chosen	6	41