Required:

1.1. How much will you have in five years?

1.2. Suppose you plan to withdraw R1 500 in four years and there is no penalty for early withdrawal. How much will you have in five years? 

Question 2

A basketball player has just signed a R30 million contract to play for three years. She will receive R5 million as an immediate cash bonus, R5 million at the end of the first year, R8 million at the end of the second year, and the remaining R12 million at the end of the contract. Assuming a discount rate of 10 percent for year 1 and year 2 and 12 percent interest thereafter.

Required:

 What is the value of the package? 

Question 3

You can invest in a machine that costs R500 000. You can expect revenues net of any expense, except maintenance costs, of R150 000 at the end of each year for five years. You will subcontract the maintenance costs at a rate of R20 000 a year, to be paid at the beginning of each year. You expect to get R100 000 from selling the machine at the end of the fifth year. All these revenues and costs are after tax, as is the 10 percent cost of capital.

Required:

Should you buy the machine? 

Question 4

Bentura is expected to generate R100 000 of net cash flows next year, R120 000 the year after, and R150 000 for the following three years. It is expected that the company could be sold for R500 000 at the end of the fifth year. The owners of Bentura, who would like to sell their company, strongly believe that their investment in the company should generate a 10 percent return.

Required:

What is the minimum price at which they should sell the company? 

Question 5

Consider the three projects A, B, and C. The cost of capital is 12 percent, and the projects have the following expected cash flows: 

Required:

5.1. What is the internal rate of return of the three projects?

5.2. What is the net present value of the three projects?

5.3. If the three projects are independent, which projects should be accepted?

5.4. If the three projects are mutually exclusive, which project should be selected?

5.5. If the total budget for the three projects is limited to R450 000, which projects should be selected?

Question 6

A toy company is evaluating a new product. The cash flows that are expected from this product over its five years’ expected life are shown below. Note that the final year’s cash flow includes R2 000 of working capital to be recovered at the end of the project. 

Required:

6.1. Compute the following measures:

I. Payback period

II. Discounted payback period at a 10 percent discount rate

III. Net present value at a 10 percent discount rate

IV. Internal rate of return

V. Profitability index

6.2. Should the project be undertaken? 

Question 7

Your company is asked to submit a bid for watering and spraying trees in a housing development for the next five years. To provide this service, the company would have to buy new equipment for R100 000 and invest R30 000 in its working capital requirement. The equipment would be depreciated straight-line to zero salvage value over the five-year period. Total labor and other costs would be R80 000 a year. The tax rate is 40 percent and the company’s cost of capital is 10 percent.

Required:

 What would be the company’s minimum bid price? 

Question 8

A snowmobile company is considering whether or not to launch a new snowmobile. It expects to sell the vehicle for R10 000 over five years at a rate of 100 per year. The variable costs of making one unit are R5 000, and the fixed costs are expected to be R125 000 per year. The investment would be R1 million and would be depreciated according to the straight-line method over five years with zero salvage value. The company’s cost of capital is 10 percent. The corporate tax rate is 40 percent. The investment would not require any significant addition to the company’s working capital requirement.

Required:

8.1. What is the net present value of the investment?

8.2. How many snowmobiles would the company need to sell to breakeven (i.e., for the project to have a zero net present value)?

8.3. At the breakeven level, what would be the project’s discounted payback period and internal rate of return?