14.6 Catalysts plc is planning the installation of a new processing plant. It currently has two alternatives

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14.6 Catalysts plc is planning the installation of a new processing plant. It currently has two alternatives under consideration:

Project Alpha: The capital cost of this plant is £10 million.

Project Beta: This plant would cost £20 million.

Forecast information for each of the alternatives is as follows:

£m Project Alpha Project Beta Revenue Payments Revenue Payments Year 1 7.6 4.0 13 5.8 Year 2 10.2 5.2 14.4 6.2 Year 3 12.8 7.8 18.6 9.6 Year 4 13.8 9.4 19.8 10.4 Year 5 16.2 10.4 12.8 11.6 The company’s cost of capital is 8 % per annum, and the relevant discount factors are shown below:

Year 1 0.926 Year 2 0.857 Year 3 0.794 Year 4 0.735 Year 5 0.681 On the basis of the net present value of the alternative projects, make a recommendation to the management of Catalysts plc as to which of the two projects should be chosen.

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Related Book For  book-img-for-question

Accounting And Finance For Business

ISBN: 9780273773948

1st Edition

Authors: Geoff Black, Mahmoud Al-Kilani

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