Beruflich Dokumente
Kultur Dokumente
1|P a g e
(6 marks)
(c) Several methods exist for evaluating investment projects under capital budgeting.
Identify and explain three features of an ideal investment appraisal method. (6 marks)
(d) In evaluating investment decisions, cash flows are considered to be more relevant
than profitability associated with the project.
(4 marks)
Question 2:
(2.)
Jordan was recently appointed to the post of investment manager of Adaptive Metals
Ltd. a quoted company. The company has raised Sh.8,000,000 through a rights issue.
Jordan has the task of evaluating two mutually exclusive projects with unequal economic
lives. Project X has 7 years and Project Y has 4 years of economic life. Both projects are
expected to have zero salvage value. Their expected cash flows are as follows:
Project
Year
2,000,000
4,000,000
2|P a g e
2,200,000
3,000,000
2,080,000
4,800,000
2,240,000
800,000
2,760,000
3,200,000
3,600,000
The amount raised would be used to finance either of the projects. The company expects to
pay a dividend per share of Sh.6.50 in one years time. The current market price per share is
Sh.50. Masada Ltd. expects the future earnings to grow by 7% per annum due to the
undertaking of either of the projects. Adaptive Metals Ltd. has no debt capital in its capital
structure.
Required:
(a)
The cost of equity of the firm (Use Gordon Model) or another appropriate valuation
model
(b)
(4 marks)
The net present value of each project using the cost of equity calculated above as the
(6 marks)
(c)
The Internal Rate of return (IRR) of the projects. (Rediscount cash flows at 24%
(d)
3|P a g e
(6 marks)
(4 marks)
(e)
Identify and explain the circumstances under which the Net Present Value (NPV) and
the Internal Rate of Return (IRR) methods could rank mutually exclusive projects in
a conflicting way.
4|P a g e
(5 marks)
1998
1999
2000
Sh.000
Sh.000
Sh.000
30,000
20,000
5,000
Accounts receivable
200,000
260,000
290,000
Inventory
400,000
480,000
600,000
800,000
800,000
800,000
1,430,000
1,560,000
1,695,000
Accounts payable
230,000
300,000
380,000
Accruals
200,000
210,000
225,000
100,000
100,000
140,000
300,000
300,000
300,000
Common stock
100,000
100,000
100,000
Retained earnings
500,000
550,000
550,000
1,430,000
1,560,000
1,695,000
Additional information:
Cash
5|P a g e
Sales
4,000,000
4,300,000
3,800,000
3,200,000
3,600,000
3,300,000
300,000
200,000
100,000
Net profit
Required:
(a)
Acid test ratio, Average collection period, inventory turnover, total debt/equity, Net
profit margin and return on assets.
(b)
From the ratios calculated above, comment on the liquidity, profitability and gearing
positions of the company.
6|P a g e