Question
Question 2 Mastermind Investments is a sovereign wealth fund focused on investing in renewable energy projects. The firm uses an 8.50% discount rate for its
Question 2
Mastermind Investments is a sovereign wealth fund focused on investing in renewable energy projects. The firm uses an 8.50% discount rate for its investments. Recently Mastermind Investments has two potential projects on hand, code-named Project Sol and Project Ventus. The estimated future after-tax cash flows of the two projects are shown in Table 2.1. Mastermind Investments is now deciding which one it should invest in.
Table 2.1
After Tax Cash flow($) | After Tax Cash flow($) | |
Year | Project Sol | Project Ventus |
0 | -5,000,000 | -5,000,000 |
1 | 900,000 | 1,200,000 |
2 | 900,000 | 1,600,000 |
3 | 900,000 | 2,000,000 |
4 | 1,200,000 | |
5 | 1,200,000 | |
6 | 800,000 | |
7 | 800,000 | |
8 | 800,000 |
Answer the following questions:
a If Mastermind Investments uses the net present value (NPV) method, which project would it choose?
b Would the decision be the same if the equivalent annual annuity (EAA) method was used? Show your calculation.
c Based on your answers to parts (a) and (b), what problem has the company encountered in selecting mutually exclusive projects? Which project should Mastermind Investments choose?
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