Q4. (Capital budgeting) 25 Marks

Global company is considering expanding its international presence. The company believes that it has great potential for international sales. Recently, 20% of the Global Companys sales were in foreign markets. The goal is to expand the foreign sales to 30%. In order to accomplish this goal, the company needs to invest heavily.

After considering tax, marketing, labour and political issues the company has decided to invest in India and Dubai. The following estimates have been provided:

India Dubai

Initial investment $2,500,000 $1,400,000

Estimated useful life 20 years 20 years

Annual revenues (accrual) $500,000 $380,000

Annual expenses (accrural) $200,000 $180,000

Annual cash inflows $550,000 $430,000

Annual cash outflows $222,250 $206,350

Estimated salvage value $500,000 $0.00

Discount rate 9% 9%

Required:

Evaluate both these mutually exclusive proposals using:

1. The cash payback period
2. The net present value (NPV)
3. Profitability index
4. Internal rate of return (IRR)