Question
Question 3 (25 marks) Your company is considering the five independent projects below. The initial outlay and the after-tax cash flows for each project are
Question 3 (25 marks)
Your company is considering the five independent projects below. The initial outlay and the after-tax cash flows for each project are as follows:
Year | Project A ($) | Project B ($) | Project C ($) | Project D ($) | Project E ($) |
0 | -1,431,819.88 | -1,430,000 | -800,000 | -600,000 | -400,000 |
1 | 500,000 | - | 100,000 | 420,000 | 140,000 |
2 | 500,000 | - | 250,000 | 220,000 | 160,000 |
3 | 500,000 | - | 350,000 | 120,000 | 180,000 |
4 | 500,000 | - | 450,000 | 80,000 | 210,000 |
5 | 500,000 | 3,558,297.60 | 600,000 | 10,000 | 220,000 |
Your companys required rate of return is 15%. Answer the following questions: A) You are asked to evaluate Project A and Project B only because your boss wants to select either Project A or Project B. ai) Use the NPV method to make your recommendation. Also, what is your choice with the IRR method? (8 marks) aii) Based on your results in part (i), your boss observes a conflict in your results. Explain to him/her why such a conflict exists and justify which project should be chosen. (5 marks)
B) Now you are asked to consider all five projects (Projects A, B, C, D and E). In addition, you are told that the fund available for the company to invest this year is limited to $2.5 million. Under strict capital rationing, please advise your boss on the best combination of projects which the company should select. (12 marks)
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