Case: CAPITAL INVESTMENT PROJECTS ANALYSIS

GeoEolic is analyzing the implementation of two mutually exclusive projects $A$

and B to update its generation equipment's and be able to supply a greater

demand to of electricity.

The acquisition cost of the equipment already installed in the plant is $$30,000$

and $$25,000$ for project A and $B$ successively. Project $A$ is estimated to obtain

additional annual cash flow inflows for the next $4$ years of $$7000,$$$10,000,$

$$13,000$ and $$10,000,$ while Project B is estimated at $$10,000,$$$15,000,$$$3,000$

and $$4,000.$ The company has a cost of capital of $8\mathrm{.}0\%.$ The Finance Manager is

requested to analyze the two options and issue his recommendation to the

General Manager by calculating:

$1.-$ The recovery period for each alternative $($payback period$)$

$2.-$ The Net Present Value $($NPV$)$ of each project

$3.-$ The profitability index of each project

$4.-$ The internal rate of return $($IRR$)$

$5.-$ Graphically and mathematically calculate the rate of the intersection point and

explain its meaning using the NPV profile.

$6.-$ Based on the results of the previous parameters, what recommendations

should the Financial manager provide?