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Magic Media Ltd is considering two projects. Project A costs R50m (excluding installation and research costs) and will generate a net cash flow of R20m per year for four years. The company incurred and paid for research costs of R1m and will incur installation costs of R2m for the plant. Projects B cost R68m and will generate a net cash flow of R27m per year for four years. The research costs incurred for this project amount to R1m and installation costs of R10m will be incurred. A working capital of R5m is required for each of the projects and will be recovered at the end of the project. The market value at the end of the project in respect of project A is estimated to be R15m while for project B is R25m. The tax depreciation deduction is 20% per year on cost using straight line basis for each project. The tax allowance rate is also 20%. The cost of capital is 11% and the corporate tax rate is 28%.
REQUIRED
Question (a) Determine incremental cash flows for Project A and project B
Question (b) Using NPV, IRR and Payback period, indicate which project should be selected by Magic Media
Question (c) Explain why the NPV and IRR techniques are preferred over the other capital budgeting techniques.
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