Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Green Light Ltd. has the option of investing in the following two projects of equal risk; they are mutually exclusive alternatives for expanding the firms

Green Light Ltd. has the option of investing in the following two projects of equal risk; they are mutually exclusive alternatives for expanding the firms capacity. The firms cost of capital is 13%. The cash flows for each project are given in the following table. PROJECT A PROJECT B Initial investment 600,000 280,000 Year Net cash inflows Net cash inflows 1 150,000 150,000 2 200,000 125,000 3 240,000 110,000 4 280,000 Green Light Ltd. has incurred a research and development expenditure of $30,000 initially for project A and $20,000 for project B, both of which are considered sunk costs for the business. Due to seasonal demand, the business believes for project A only, they will have to incur additional electricity charge of $2,000 each year till year 4.The business believes for project B only; they will have to incur additional maintenance cost of $3,000 in year 2 and $2,000 in year 3. At the end of year 4, the business believes that they could sell project A for $50,000 and at the end of year 3 project B for $40,000. The finance manager has also suggested that any investment that takes more than 3 years to pay back the initial investment should be rejected.

Calculate the net present value for each project. Using the net present value criterion, which project is preferable and why? Show workings. (7 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Global Business Today

Authors: Charles Hill

7th Edition

0078137217, 9780078137211

More Books

Students also viewed these Finance questions

Question

Evaluate abx for a = 4, b = 3, and x = -2.

Answered: 1 week ago

Question

Describe the contributions of Keller and Marion Breland.

Answered: 1 week ago

Question

1. Background knowledge of the subject and

Answered: 1 week ago

Question

2. The purpose of the acquisition of the information.

Answered: 1 week ago