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2. Suppose that a company is considering for investment in a projects proposed by l regional state in two different and mutually exclusive projects: details regarding cost of investment and expected cash flows are given as follows: The two Projects have an initial in vestment cost for Project one and Project two Br. 1,780,000 and Br. 3,220,000 respectively. The discount rate for project evaluation is 12% which is the market rate. Additionally the operating costs and expected cash flows are given under the following table. Year Project one Project Y Operating cost Cash inflow Opportunity cost Cash inflow 1 Br. 420,000 Br. 685,000 2 80,000 515,000 85,000 595,000 3 375,000 650,000 4 60,000 500,000 702,000 5 565,000 92,000 615,000 Required: which project should be selected by the company using the following methods a. Payback period method b. Net present value method

Respuesta :

anthougo

Based on payback period and NPV methods, the company should select Project One.

Data and Calculations:

                                                 Project one              Project two

Initial investment cost            Br. 1,780,000          Br. 3,220,000

Project discount rate = 12%

                                                 Project one                     Project two

Year                              Operating   Cash inflow     Operating   Cash inflow

                                         Cost                                      Cost

1                                                       Br. 420,000                             Br. 685,000

2                                   80,000              515,000          85,000            595,000

3                                                             375,000                                  650,000

4                                   60,000            500,000                                   702,000

5                                                            565,000         92,000              615,000

Total costs/inflows Br. 140,000  Br. 2,375,000   Br. 177,000    Br. 3,247,000

Payback period                     5 years                                 5+ years

Calculation of the Net Present Values:

Project One

Year      Net Cash Flows     PV Factor          PV

0             (Br. 1,780,000)          1             (Br. 1,780,000)

1                Br. 420,000      0.893            Br. 375,060

2                    435,000       0.797                  346,695

3                    375,000        0.712                 267,000

4                    440,000       0.636                 279,840

5                   565,000       0.567                 320,355

Net present value                                 (Br. 191,050)

Project Two

Year      Net Cash Flows     PV Factor          PV

0             (Br. 3,220,000)          1             (Br. 3,220,000)

1                 Br. 685,000      0.893                Br. 611,705

2                       510,000      0.797                    406,470

3                      650,000       0.712                   462,800

4                      702,000      0.636                   446,472

5                      523,000     0.567                    296,541

Net present value                                   (Br. 996,012)

Thus, based on payback period and NPV methods, the company should select Project One.

Learn more about Calculating the Payback Period and Net Present Value here: https://brainly.com/question/14316388

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