Mr. R.K. Thapa has a degree in leather technology from the Central Leather Research Institute of India. Encouraged by the package of incentives offered by his home country of Gautambhumi for units manufacturing value-added leather products, he is examining several investment options. The first project is a leather tannery to produce finished leather. The second proposal is for leather garments manufacturing unit. A third alternative is to go in for full leather shoe manufacturing. Finally, he can opt for a PVC shoe-lasts unit to manufacture different shoe-lasts. These four options are mutually exclusive and only one of the four can be implemented. The opportunity cost of funds is 10%. Mr. Thapa wants to evaluate these projects using the a) Net Present Value (NPV), b) Internal Rate of Return (IRR), c) Modified Internal Rate of Return (MIRR), d) Net Benefit-Cost Ratio (profitability index) and e) Gross Benefit-Cost Ratio Mr. Thapa has constructed the following net cash flows (benefits minus costs) for the four projects (Table-I). Year Zero represents the year of investment. Table I: Net Cash Flows (Beginning of Year figures in million Local Currency) Year 1 2 3 4 5 -2.350 1.56 -1.050 0.14 -1.580 0.48 -1.576 0.80 Tannery 1.60 1.65 1.70 1.590 Garments 0.26 0.41 0.50 0.600 Shoes 0.48 0.54 0.60 0.590 Shoe-lasts 1.40 1.62 1.68 1.388 The operating costs of these projects are estimated as shown in Table-II, but these have already been accounted for in the net cash flows of Table-I. Table II: Operating/Recurrent Costs (Cash Outflow) (Beginning of Year figures in million Local Currency) Year Tannery Garments Shoes Shoe-lasts 2 0.300 0.280 0.200 3 0.360 0.330 0.300 0.290 0.210 0.230 0.196 4 0.390 0.320 0.250 0.278 0.400 0.340 0.250 0.326 0.174 0.218 Question 1 a) Please make appropriate tables in excel and rank the four projects using each of the investment criteria mentioned above. b) Which project would you choose? Why? Hint: Gross Benefit = Net Benefit + Recurrent costs Gross Cost = Investment costs + Recurrent costs Question 2 a) An analyst argues that the Net Present Value and the Net Benefit Cost Ratio are equally reliable in deciding whether a project should be implemented or not; and that they are also equally reliable in selecting between projects. Mention whether you agree with both statements of the analyst or not. Explain your answer. b) An analyst argues that when assessing the viability of a project, a Net Benefit Cost (B/C) Ratio greater than one means that the NPV of the project is positive and so the B/C ratio is a reliable criterion for deciding whether to accept a project or not. Do you agree with the analyst? Explain. c) An analyst argues that the internal rate of return (IRR) is an unreliable criterion for selecting among projects even if the net cashflows of all the projects have unique IRRS. Do you agree with the analyst? Explain your answer. ... J20 fe A D E F G H 1. K L M N R T U V 3 4 NET CASH FLOW Year 1 3 4 6 Tannery 7 Garments Shoes Shoe-lasts 10 OPERATING 11 COSTS 12 Year 1 3 4 13 Tannery 14 Garments 15 Shoes 16 Shoe-lasts 17 18 19 DISCOUNTED NET CASH FLOW 20 Year 1 3 4 5 21 Tannery 22 Garments 23 Shoes 24 Shoe-lasts 25 26 GROSS BENEFITS Gross Year 1 2 3 4 Benefit 27 28 Tannery 29 Garments 30 Shoes 31 Shoe-lasts 32 33 GROSS COSTS PV of Year 2 3 4 5 Gross 34 Costs 35 Tannery 36 Garments 37 Shoes 38 Shoe-lasts Discounting Project Ranking Cover COLDL F21 A D E G H. J K 2 3 PROJECT 4 CRITERIA Net Benefits/Investment Cost NPV (million LC) IRR MIRR Gross Benefits/Gross Costs ratio 5 ratio 6 Tannery 7 Garments 8 Shoes 9 Shoe-lasts 10 11 PROJECT 12 RANKING Net Benefits/Investment Cost NPV (million LC) IRR MIRR Gross Benefits/Gross Costs ratio 13 ratio 14 Tannery 15 Garments 16 Shoes 17 Shoe-lasts 18 19 20 21 22 23 24 25 26 Cover Discounting Project Ranking 6:06 PM P Type here to search E) 29C A O G 4)) ENG 10/20/2021