Question
Environ Ltd requests you to evaluate two new capital budgeting proposals and provide your recommendations. You are required to submit a report by responding to
Environ Ltd requests you to evaluate two new capital budgeting proposals and provide your recommendations. You are required to submit a report by responding to the underlisted questions. In your report, state any assumptions made and clearly show all your steps in the calculations undertaken towards reaching your conclusions.
Instructions are as follows:
Provide an evaluation of two proposed projects: landfill and borehole. The initial outlays are $100,000 and $250, 000, respectively for the landfill and borehole. Environ Ltd has set the required rate of return for both projects to 15%. The expected after-tax cash flows from each project are as presented in the Table 1 below.
Question 2 [35 marks]
- Which project should Environ Ltd accept? Use the net present value (NPV) criterion to evaluate both projects. Explain in detail, including all calculations. Also, clearly state all your assumptions. (15 marks)
- Determine the IRR for each project. According to the IRR, which project should be accepted? Explain in detail, including all calculations. (10 marks)
- Would your conclusions in parts (a) and (b) change if the required rate of return increased to 14%? Explain in detail, including all calculations. [10 marks]
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