Tutorial 9: Theme 2: Economic Evaluation

You have been appointed as project manager of BCX IT division to oversee

the development of an expansion project. Two mutual exclusive alternatives
are available. You have been tasked by the Project Director to present to the
Steering Committee the best proposal going forward and are requesting
approval at the meeting for the proposed alternative. The result of the
feasibility study highlighted the following. Alternative A will have a lifespan of 8
years and Alternative B 5 years.
Alternative A’s initial capital investment is $2,5m and will be executed in
Chicago USA, the USA PPI is 1.5% and the prediction is that it will remain
constant for the next 10 years. Alternative B will be executed in Cape Town,
South Africa, The South African PPI is 6.5% and will stay constant for 5 years
where after it deteriorate 1% per year for the next 15 years. Both projects will
be implemented in one year. The net before tax cash flow income that will be
generated for Alternative A is $1200k per year increasing yearly with 15%.
The initial investment for Project B is R20m and the monthly net before tax
cash flow income is R1m increasing 8% per year. The Exchange rate is R12/$
when the project is executed and the first year of production where after it will
deteriorate at 2% per year. As BCX is an international company all final
evaluations must be calculated and presented in US$.

Question 1a [6]

Calculate the yearly Cash-flow in Millions US$ for Alternative A and

Alternative B.
Show all calculations.

Question 1b [2]

Calculate the NPV for Alternative A.

Question 1c [3]

Calculate the NPV for Alternative B.

Question 1d [4]

Calculate the breakeven point for Alternative A and B, draw a graph that
shows both Alternatives.

Question 1e [5]

In the event that the tax rate in RSA is 5% due to tax incentives and in USA
20%, calculate the after tax NPV for both Alternatives in the event that
depreciation is not allowed in both countries.

Question 1f [5]

©BF van Waveren2021 Tutorial 9

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Tutorial 9: Theme 2: Economic Evaluation

Which Alternative will you recommend to the Steering Committee? Please

explain why?

©BF van Waveren2021 Tutorial 9

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