FIN3704 Assignment 5 (Detailed Answers) Semester 2 Due 15 October 2024

Question 1 (10 Marks) Given the following set of cash flows: Period Cash Flow 1 45 000 25 000 (2) a. If your required rate of return is 9% per year, calculate BOTH the present and future value of the above stream of cash flows? b. Now, suppose that you are offered another investment that is identical, except that the cash flows are reversed (i.e., cash flow 1 is 20 000, cash flow 2 is 30 000, cash flow 3 is 35 000, cash flow 4 is 40 000 and cash flow 5 is 45 000). Is this worth more or less than the original investment? Why? (4) c. If you paid R1000 000 for the original investment, what average annual rate of return would you earn? What return would you earn on the reversed cash flow? Use the IRR function. (2) d. Still assuming that your required return is 8%, would you be willing to purchase either of these investments? Explain why or why not. (Question 2 (20 Marks) The Port Saint John Water Park has thought about buying a new log flume ride. The equipment costs R900 000 to purchase, and installation costs an additional R56400. The equipment has a six-year expected life and will be depreciated using the MACRS seven-year class life. Management anticipates 160 rides per day, with 45 riders on average per ride. The season Will last for 130 days per year. The ticket price per rider is expected to be R6.25 in the first year, with an annual increase of 5%. The variable cost per rider will be R1.75, with a total annual fixed cost of R625 000. The ride will be dismantled after six years at a cost of R354 000, and the parts will be sold for R700 000. The capital cost is 8.50%, and the marginal tax rate is 25%. a. Calculate the initial outlay, annual after-tax cash flow for each year, and the terminal cash flow. (14) b. Calculate the NPV, IRR, and MIRR of the new equipment. Also, indicate whether the projec