CONSTRUCTION MANAGAMENT

Q2. A company has the option of investing in Project A or Project B, but not both. The company uses a discount rate of 14% and depreciates assets using the straight line method. Project A requires an initial investment of t70,000 and Project B requires an initial investment of t60,000. The equipment purchased for Project A would be disposed of at the end of year 5 with a $10,000 scrap vahie. The equipment purchased for Project B would be disposed of at the end of year 3 with a nil scrap value. The profit projections for the two projects (excluding the initial investments and scrap values) are: Year Profit (6) Project A Project B 1 37,000 30,000 2 40,000 47,000 3 48,000 38,000 4 41,000 31,000 5 28,000 (a) Calculate the payback period for both projects. (15 marks) (6) Calculate the NPV (Net Present Value) for both projects. See Table 2a. (25 marks) (c) Advise the company on which project to accept (stating your reasons based on depreciation and profitability index). (10 marks) Table 2a TABLE A PRESENT VALUE OF ONE UNIT-VALUE OF MONEY Years Hence 1% 2% 4% 6% 8% 10% 12% 14% 15% 16% 18% 20% 22% 24% 25% 26% 28% 30% 35% 40% 45% 50% 1 0.990 0.980 0-962 0.943 0.926 0.9090-893 10.877 10-8700-8620-8470-8330-8200-8060-800 0-794 0.781 0.769 0.741 0-7140-690 0-667 2 0-9800.961 0.925 0-890 0.8570-82610.797 10.7690-756 0-7430-718 0-694 0-672 0-6500-6400-6300-610 0-592 0.549 0-5100-476 0-444 3 10-971 0.9420-8890-840 0.794 0-7510-7120-6750-6580-6410-609 0.579 0.551 10.524 0.512 0.500 0.477 0.455 0-406 0-3640-328 0.296 0-961 0.924 0-855 0.792 0-7350-6830-636 0-592 0-5720-552 0-5160-4820-4510-423 0-4100-397 0-3730-350 0-301 0-2600-2260-198 5 0.951 0.906 0-822 0-747 0.681 0-6210-5670-519 0.4970-4760-437 0.402 0.370 0-341 0-3280-315 0.291 0.269 0-2230-1860-156 0-132 6 0.942 0.888 0.790 0.705 0-6300-5640-5070-4560-4320-410 0.370 0-3350-303 0-275 0.262 0-2500-227 0.207 0-1650-133 0-1080-088 7 0-9330-871 0.7600-665 0.583 0-513 0.452 0-400 0.376 0.3540-314 0.279 0-2490 222 0.210 10-1980-1780-159 10-122 0-095 0.074 0-059 8 0.923 0-8530-731 0-627 0.540 0.467 0.4040-3510-3270-305 0.266 0-233 0.2040-1790-168 0.157 0.139 0.123 0-0910-068 0.051 [0.039 9 0.914 0.8370-703 0.5920-5000-424 0.361 0-308 0-284 0.263 0-225 0-1940-16710.144 0.134 0.125 0.1080-094 0.067 0.0480-035 0.026 10 0.9050-8200-676 0.558 0.463 0-3860-322 0.2700-247 0.2270-1910-162 0.137 0.116 0.107 0-099 0-085 00730-0500-035 0.024 0.017 11 0-8960-804 0-650 0-5270-4290-350 10-287 0.2370-2150-1950-162 0-1350-112 0.094 0.086 0-07910-066 0.0860-037 0.025 0.017 0-012 12 0-8870-788 0-625 0.497 0.397 0-319 10-257 0-208 0.187 0-1680-1370-112 0.092 0.076 0.069 0.062 0.0520-043 0.027 0.018 0-012 0.008 13 0-87910.773 0.601 0.4690-368 0.2900-229 10-1820-163 0-145 0.116 0.093 0-0750-061 0-055 10-0500-040 0.033 0-020 0-0130-0080-005 14 0-8700-7580-577 0.442 0.340 0.263 0.205 0.160 0.141 0.125 0.099 0-078 0.062 10-0490-0440-039 0-032 0.025 0.015 0009 0.006 0.003 15 0.861 0.7430-555 0:417 0.3150-2390-1830 140 0.123 0-1080-084 0.065 0-051 0-040 0.035 0.031 0.025 0.0200-0110-006 0.004 0.002 16 0-853 0.7280-534 0.394 0.292 0.2180-163 0.123 0.1070-0930-0710-0540-042 0.0320-028 0.025 0.019 0-015 0.008 0.005 0.0030-002 17 0.8440-7140-513 0.371 0.2700-1980.146 0-108 0.093 0-080 0-0600-0450-034 0.026 0.023 0.020 0-015 0-0120-006 0.003 0.002 0.001 18 0.836 0-700 0.4940-350 0.250 10-180 0.1300-095 (0-081 0.069 0.051 0.038 0-028 0.021 0-018 0-016 0.012 0-009 0.005 0.002 0.001 0.001 19 0-828 0-6860-175 0-331 0.232 10.1640.11610-0830-0700-0600-0430-031 0.023 0.017 0014 0-012 0.0090.007 0.003 0.002 0.001 20 0-8200-673 0.456 0.312 0.215 0.149 0.1040.0730-061 0-051 0.037 0-0260-019 0.014 0-0120-010 0.007 0.005 0.002 0.001 0-001 21 0.811 0-660 0-439 0-294 0-1990-135 0-093 0.064 0-053 0.044 0-031 (0-022 0.0150-0110-009 0.008 0.006 0.004 0.002 0.001 0.803 0.647 0.4220-278 0.1840-123 0-083 0.0560-046 0.0380-0260-018 0-013 0-009 0.0070-0060-0040-0030-001 0-001 0.795 0-6340-406 0.262 0.170 0.112 0-0740-049 0-040 0-0330-022 0-015 0-0100-0070-0060-0050-003 0-0020-001 0.788 0-622 0-390 0-247 0.158 0-102 0.0660-043 0.035 0.028 0-0190-013 0-008 0.006 0.005 0.004 0-003 0-00210-001 25 0-7800-61010-375 0.2330-146 0-092 0.0590-038 0.030 0.024 0.0160-0100-0070.005 0.0040.003 0.002 0.001 0.001 26 0.7720-598 0-3610-2200-1350-084 0-0530-033 0.0260-021 0.014 0.0090.006 0.0040-003 0.002 0.0020-001 27 0.764 0.586 0-3470-207 0.125 0.076 0.0470-029 0-023 0-018 0-011 0.007 0.005 0.003 0.002 0.002 0.001 0.001 28 0.757 0.5740-3330-1960.116 0.069.0-042 0.0260-0200-016 0010 0.006 0-004 0.002 0.002 0.002 0.001 0.001 29 0.749 (0.563 0.321 0-1850-107 0.063 0.037 0.022 10-0170-0140.008 0.005 0.003 0.002 0.002 0.001 0.001 0-001 30 0.742 0-5520-308 0.1740.09910-057 0.033 0.0200-015 0-01210.007 0.004 0.003 0.002 0.001 0.001 0.001 40 0-672 10.453 0.208 0-0970-0460-022 0.0110.0058-0040-0030-001 0.001 50 0-608 0.3720-141 (0-054 0.021 0.0090.003 0.001 0.001 0.001