Reference no: EM133168438

Question 1 - The following information relating to an investment in equipment has been extracted from the books of Pro-CB Ltd:

Total purchase price $69,066; salvage value $3,746 at the end of year-4; net sales revenue (relating to the equipment):

Year-1 $35,000;

Year-2 $27,000,

Year-3 $21,000 and

Year-4 $15,000;

Applicable tax rate is 30%; and the required rate of return is 13%.

If the depreciation rate is 18% straight line, calculate the tax amount in the fourth year relating to the sale of the equipment only.

Question 2 - The following information about two mutually exclusive projects H and K are relevant for requirements (a) to (c) only. W-Max Company is considering investing in project-H, which will require an outlay of $500 million. The project will have a four-year life and at the end of that time, the equipment will be scrapped.

The project is expected to generate the following annual cash flows:

	Year-1	Year-2	Year-3	Year-4
Cash inflows	$540m	$440m	$460m	$400m
Cash outflows	$315m	$245m	$265m	$250m

The company has a required rate of return of 10.29%. The company normally has two-year payback criteria. The applicable tax rate is 30%.

The alternative project-K offers the following net cash flows:

Year-0 ($500m); Year-1 $131m; Year-2 $179m; Year-3 $239m and Year-4 $282m.

(a) Calculate the (i) NPV, (ii) IRR, (iii) PVI, (iv) Payback period, (v) Discounted payback period for projects H and K.

(b) Calculate the crossover rate (between projects H and K) based on the cash flow data mentioned above. Show the range of required rates for which either project-H or project-K would be preferred.

(c) Based on your findings in requirements a and b above, what would be the decision of selection of project (when the required rate of return is 10.29 percent)?