Banden is a highly geared company that wishes to expand its operations. Six possible capital investments

have been identified, but the company only has access to a total of $620,000. The projects are not divisible

and may not be postponed until a future period. After the project's end i is unlikely that similar investment

opportunities will occur.

Expected net cash inflows (including salvage value)

Project Year 1 Year 2 Year 3 Year 4 Year 5 Initial outlay

$ $ $ $ $ $

A 70,000 70,000 70,000 70,000 70,000 246,000

B 75,000 87,000 64,000 180,000

C 48,000 48,000 63,000 73,000 175,000

D 62,000 62,000 62,000 62,000 180,000

E 40,000 50,000 60,000 70,000 40,000 180,000

F 35,000 82,000 82,000 150,000

Projects A and E are mutually exclusive. All projects are believed to be of similar risk to the company's

existing capital investments.

180,000

175,000

Any surplus funds may be invested in the money market to earn a return of 9% per year. The money

market may be assumed to be an efficient market.

Banden's cost of capital is 12% a year.

Required

(i) Calculate the expected net present value for each of the six projects.

(ii) Calculate the expected profitability index associated with each of the six projects.

(iii) Rank the projects according to both of these investment appraisal methods. Explain briefly

why these rankings differ.

Give reasoned advice to Banden recommending which projects should be selected.