Great Comfort Inc. are producing high end furniture in the USA and are looking to expand their

operations. They have analyzed their opportunities and are currently considering two potential ways

of expanding either in South America or in China. They are only able to choose one of the two

markets.

If they choose to expand in South America, they expect to have to invest USD300 million in a plant,

which they expect would yield a yearly return of USD45 million for the next 15 years.

If they instead choose to expand in China, they expect they would have to invest USD370 million,

which would return USD25 million yearly for the first 4 years, followed by a yearly return USD60

million for the following 5 years and finally a yearly return of USD90 million for the last 6 years.

Assume that the investment is made in year 0 and payments are made at the end of periods with

first payment end of year 1.

Answer the following:

1. Visualize the stream of cash flows for each investment opportunity.

2. Great Comfort Inc. demands a payback period of maximum 9 years. Calculate the payback

period for both investment opportunities. Do they live up to the requirement? According to

this, which is the preferred option?

3. Great Comfort Inc. has a discount rate of 7%. Calculate the Net Present Value (NPV) of both

investments and state which is the preferred option in this case.

4. Calculate the Internal Rate of Return (IRR) for both opportunities and comment on what this

tells us about the options.

5. What are some disadvantages of the Payback Method?

3:16 Task 2.3 - Capital Budgeting Great Comfort Inc. are producing high end furniture in the USA and are looking to expand the operations. They have analyzed the opportunities and are currently considering to of expanding either in South America or in China. They are only able to choose one of the two markets if they choose to expand in South America, they expect to have to invest USD in aptent which they expect would yield a yearly return of USD million for the next year. if they instead choose to expand in China, they expect they would have to invest USD 0 - which would return USO25 milion yearly for the first years, followed by a yearly return 060 million for the following 5 years and finally a yearly retum of USD90 million for the last year Assume that the investment is made in year and payments are made at the end of period first payment end of year 1. @u Business School Answer the following 1. Vise the stream of cash flows for each investment opportunity 2. Great Comfort Inc demands a payback period of a year. Calculate the payback period for both investment opportunities. Do they live up to the requirements According to this, which is the preferred option? 2. Great Comfort Inc has a discount rate of 7%. Calculate the Net Present Value of both investments and state which is the preferred option in this 4. Calculate the Internal Rate of Return (IRR) for both opportunities and coon what this tells us about the options 5. What are some disadvantage of the Payback Method? Show your calculations Grading Rubrica 100 points 40% 10% Description The student demonstrates understanding of the concepts and uses the night approach with the formules The student explains the calculations and which is the theory behind The student applies the right numbers in the formulas The student finds the right answer The student shows an accurate presentation 10% 5% euruni.online