Question

1. You are a financial manager for ABC Corp. trying to figure out which of three mutually exclusive projects to choose from, all of which are within the budget of the company. According to your projections, Project A will require an initial cash outlay of $2 million and promises to pay out $2 million after one year and $3 million after two years. Project B will require an initial cash outlay of $3 million and promises to pay out $3 million after one year and another $2.5 million after two years. Project C will require a cash outlay of $500,000 and will generate $2 million every year for the next five years. Which of the projects (A, B or C) should you choose to pursue, and why?(Show all your work)

2.Suppose US government bonds have an interest rate of 7% per year. If you invest $6,000 in the US government bond for one year, the exchange rate today is 20 South African rands (currency) to one U.S. dollar, and the dollar depreciates 8% with respect to the rand over the next year, what is the rate of return in terms of rands at the end of that year? (Show all your work)

Answer 1

Part (1):

IRR of the three projects are as follows:

Project A: 82.2876%

Project B: 54.0833%

Project C: 399.8718%

Since Project C has the highest IRR, the same is chosen.

Details of calculation as follows:

Part (2):

Current exchange rate= Rand 20/ USD

Rate of depreciation of Dollar over 1 year= 8%

Exchange rate after one year= 20/1.08= Rand 18.518519 / USD

Rate of return= -0.925926% as follows: