Grupo Ribeirinho is a diversified industrial conglomerate based in Portugal. The head office staff are currently evaluating investment proposals put up by different divisions for approval.

The telecoms division has put forward a proposal to produce a smart cellphone that, because of rapid technological change, can only be expected to have a four-year life, once the production facilities have been set up during the first 12 months.

The industrial property division proposes taking a four-year lease on a building that already has a tenant paying an annual rent.

The mining division propose to spend €1.5 million extracting a small copper deposit. The deposit would be fully depleted after three years. At the end of that time, the environmental damage the company had caused would need to be rectified at a cost of €0.75 million.

The net cash flows of all three projects (excluding working capital) are as follows (€000s):

Year Telecoms Property Mining 0 21 000 21 000 21 500 1 21 000 1200 1500 2 1800 1400 1 1000 3 1800 1400 1800 4 1800 1400 2750 5 1800 Grupo Ribeirinho normally uses payback to evaluate projects with a decision criterion of three years.

Required:

(a) Calculate the payback of all three projects and determine the decision advice.

(b) If the Telecoms and Property division projects were mutually exclusive, which project would you advise the company to accept? Think carefully before reaching a decision and then justify your decision.

(c) If the Property and Mining division projects were mutually exclusive, which project would you advise the company to accept? Again, think carefully and justify your decision.

(d) Comment on the company’s use of the same decision criterion for projects from all three divisions. Would you think this wise?

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