Math Problem Statement

The directors of Hybrid Ltd intend expanding the company and they have the choice of investing in one of two projects at the start of 2025 viz. Project A or Project B. Each project is expected to have a five-year life, with only Project A having a residual/scrap value of R300 000. The annual cash inflows from each project are estimated at R3 100 000. The company desires a minimum rate of return of 14%.

Project A is anticipated to cost R4 800 000 excluding R300 000 for installation. The annual cash outflows are estimated to be R1 300 000 for year one. These cash outflows are expected to increase by R100 000 per year thereafter. Depreciation is estimated to be R960 000 per year.

Project B cost is expected to cost R5 100 000 including R400 000 for installation. The annual cash outflows are estimated to be R1 500 000. Depreciation is estimated to be R1 020 000 per year. Refer to the investment opportunities for 2025 and calculate the following. Ignore taxes. Use only the four decimals present value tables that appear after question 2.3. 2.2 Net Present Value of both projects

Solution

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Math Problem Analysis

Mathematical Concepts

Net Present Value (NPV)
Discounted Cash Flow (DCF)
Capital Budgeting

Formulas

NPV calculation formula

Theorems

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Suitable Grade Level

Professional