A Spanish company is considering two hotel projects in December 2021. Project A will be in Jamaica
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A Spanish company is considering two hotel projects in December 2021. Project A will be in Jamaica and Project B will be in Haiti.
| Project A | Project B | ||||
| US#x27;000 | US#x27;000 | ||||
Initial investment | 865,000 | 750,000 | ||||
Year 1 cash inflow | 316,000 | 200,000 | ||||
Year 2 cash inflow | 350,000 | 200,000 | ||||
Year 3 cash inflow | 350,000 | 200,000 | ||||
Year 4 cash outflow | ( 20,000) | ( 15,000) | ||||
Year 4 cash inflow | 280,000 | 290,000 | ||||
Year 5 cash inflow | 250,000 | 260,000 |
The cost of capital for the Spanish company is 10%. The risk premium for the Spanish company is 5%.
Required: | ||
| a.Calculate the net present value for Project A. | (7 marks) | |
b.Calculate the net present value for Project B. | (7 marks) |
- Management can only accept one project. Which project should management accept?
Explain your answer. (3 marks)
- For future investment projects the Board of Directors have decided to use the payback period method for evaluation of investment projects. Some directors are unclear about this method and the Chairman of the Board wants you to create a one page document explaining this method, which should include the decision criterion to be
used under different circumstances. (8 marks)
Expert Answer:
a Calculation of NPV for Project A Year 0 Initial investment 865000 Year 1 Cash inflow 316000 ... View the full answer
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