The following information relates to Tinaye company which is intending on investing in a new project to maximize its value and requires an assistance of an analyst in determining which project is more worthwhile.

Question

PERIOD                PROJECT A                PROJECT B                  PROJECT C
0                            (R 50 000)                    (R30 000)                    (R40 000)
1                              R14 000                      R8 000                         R20 000
2                              R20 000                      R4 000                         R20 000
3                              R26 000                      R12 000                       R5 000
4                              R5 000                        R10 000
5                                                                  R9 000

Assume WACC of 8%

Required:

Determine which of the three projects is more worthwhile by using Net Present Value method.          (20 Marks)

Bot GPT 3.5 · Answer

To calculate the Net Present Value (NPV) for each project, we need to discount the cash flows at the given WACC of 8%. The formula for calculating NPV is: $$ NPV = \sum_{t=0}^{T} \frac{Cash Flow_t}{(1 + WACC)^t} - Initial Investment $$ Where: - $ Cash Flow_t $ = cash flow at time t - $ WACC $ = Weighted Average Cost of Capital (8% in this case) - $ Initial Investment $ = initial investment at time 0 - $ T $ = number of periods Project A: - NPV = (-50,000)/(1+0.08)^0 + 14,000/(1+0.08)^1 + 20,000/(1+0.08)^2 + 26,000/(1+0.08)^3 + 5,000/(1+0.08)^4 + 0/(1+0.08)^5 - NPV = -50,000 + 12,963.00 + 18,518.52 + 20,444.50 + 3,596.30 + 0 - NPV = $5,522.32 Project B: - NPV = (-30,000)/(1+0.08)^0 + 8,000/(1+0.08)^1 + 4,000/(1+0.08)^2 + 12,000/(1+0.08)^3 + 10,000/(1+0.08)^4 + 0/(1+0.08)^5 - NPV = -30,000 + 7,407.41 + 3,348.21 + 11,002.69 + 7,453.06 + 0 - NPV = $66,11.38 Project C: - NPV = (-40,000)/(1+0.08)^0 + 20,000/(1+0.08)^1 + 20,000/(1+0.08)^2 + 5,000/(1+0.08)^3 + 0/(1+0.08)^4 + 9,000/(1+0.08)^5 - NPV = -40,000 + 18,518.52 + 16,460.91 + 4,989.34 + 0 + 6,912.90 - NPV = $6,881.67 Based on the NPV calculations, Project B has the highest NPV of $6,112.38, making it the most worthwhile project to invest in.