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Question 1

A company has to decide whether to select a project or not. The following information are provided:

The cost of the capital expenditure involved is $55,500

Discount rate of the project is 12%,

Company will have to spend $8,500

on net working capital that will be returned to him at the end of the project

He will depreciate his capital expenditure using straight line method over the project life.

The duration of the project is 6 years.

Tax rate of the project is 18%

His accountant has forecast a

revenue of $ 21,000 annually. The company is expecting $7600 of rent revenue

Further information is provided:

Supplies expense

$800

Supplies

$1300

Salary expenses

$1400

Unearned Revenue

$6100

Utilities

$ 1050

Rental expenses

$950

Prepaid Rent

$1500

At the end of the project he will sell the equipment purchased initially [CAPEX] at 5000

The salvage value of CAPEX is $7500

REQUIRED

a) Calculate the initial investment b) Calculate each year cash flow c) Calculate the terminal value of

the asset used

d) Calculate the NPV for this

project.

e) If a company is faced with two

projects

Project A has a NPV of -$2000

Project B has a NPV of -$1500 Which project is the company going to choose? Why?

f)Calculate the Profitability Index [PI]. What is the purpose of calculating PI of projects?

g) Calculate IRR of the project.

h) What does IRR mean and how do

we use this to choose a project ?