Q6. Peter would like to know more about the cash flows in a company.
He asked Eric, the Finance Manager of the company the following questions? (10 Marks) A. When there are projects with different useful lives, what are the two methods of comparing the projects? (2 Marks). B. Why is depreciation and amortisation added back when calculating free cash flows generated by a project? (2 Marks). C. What difficulties are associated with valuing real assets compared to financial assets? (3 Marks). D. Explain under what circumstances the NPV and IRR could provide different decisions. (3 Marks). Q7. Amanda started a home delivery cafe and need to buy a motorcycle for delivery orders. She has two models in mind. Model A is a Hyundai, costs $9000 and with an expected life of 6 years; model B is a Toyota, costing $14 000 and with an expected life of 10 years. The maintenance costs are $800 for model A and $700 for model B annually. Assume that the opportunity cost of capital is 10 per cent. Which one should Amanda buy using: (10 Marks). A) the NPV perpetuity method and (2 Marks for correct formula, 2 Marks for correct workings and 1 Mark for correct answer to equal a total of 5 Marks). B)the EAC method? (2 Marks for correct formula, 2 Marks for correct workings and 1 Mark for correct answer to equal a total of 5 Marks).
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