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Question 3. Nordic Tours Limited is planning to diversify its operations by exploring two new business opportunities. Opportunity Aurora Tent has an expected working life
Question 3. Nordic Tours Limited is planning to diversify its operations by exploring two new business opportunities. Opportunity Aurora Tent has an expected working life of four years, requires 160,000 of initial capital expenditure and a further 50,000 of working capital. At the end of year 4 the residual value is forecast to be 30,000. Opportunity Aurora Tent also has an estimated working life of four years and has an initial cash outflow of 250,000 which includes working capital of 85,000. At the end of year 4 the residual value is estimated to be 90,000. Estimates for net cash flow for both projects are as follows: Year Aurora Tent Arctic Cabin 1 85,000 85,000 80,000 80,000 85,000 82,000 80,000 80,000 2 3 4 Year 1 2 3 Present Value Rates at 15% 0.87 0.756 0.658 0.572 Present Value Rates at 30% 0.769 0.592 0,455 0.350 4 Required: Utilising the above information, numerically assess the projects using: - Payback Net Present Value using the present value rates at 15% - Internal rate of return using present value rates at 30% (5 Marks) (5 Marks) (5 Marks) b. Critically evaluate and make recommendation on which project should be undertaken? Please justify your recommendations using appropriate academic literature. (5 Marks) TOTAL MARKS. 20 Continued on next page
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