Question 5

10 points

Batelco Inc. is considering two mutually exclusive projects A and B. Each project requires an initial investment as presented in the below table. The economic life of the project A

will be 5-Year's and Project B will be 6 years, and both projects carry same risk. Batelco Inc uses a discount rate of 12%. After considering the current economic situation Batelco

Inc. has set a maximum payback period of 4 years and minimum return on investment (ROD 18%. A financial analyst, prepared estimates of the annual revenues and costs associated

with each project as in the below table:

the working capital will be released 5th and 6th year of the project A and project B respectively, for investment elsewhere within the company.

Required:

Required:

1. Calculate the net present value for each project. (4 Marks)

2. Calculate the simple rate of return for each product. (4 Marks)

3. Which of the two projects (if either) would you recommend that Batelco Inc. accept? Why? (2 Mark)

Present value (table 14B-1) is given below to determine the appropriate discount factor (s) using the tables provided.

10 points Question 5 Batelco Inc. is considering two mutually exclusive projects A and B. Each project requires an initial investment as presented in the below table. The economic life of the project A will be 5-Year's and Project B will be 6 years, and both projects carry same risk. Batelco Inc uses a discount rate of 12%. After considering the current economic situation Batelco Inc. has set a maximum payback period of 4 years and minimum return on investment (ROI) 18%. A financial analyst, prepared estimates of the annual revenues and costs associated with each project as in the below table: Projects B Projects A 240,000 470,000 Cost of equipment Working Capital needed Overhaul of the equipment in 60,000 80,000 12000 14000 two years Annual revenues and costs: Sales revenues 375,000 300,000 Variable expenses 180,000 90,000 Depreciation expense 48,000 78,333 Fixed out-of-pocket operating 90,000 70,000 costs Life of Project 5 year 6 years. Cost of equipment Working Capital needed Overhaul of the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs Life of Project Projects A 240,000 60,000 12000 375,000 180,000 48,000 90,000 5 year Projects B 470,000 80,000 14000 300,000 90,000 78,333 70,000 6 years Life of Project 5 year 6 years The working capital will be released 5th and 6th, year of the project A and project B respectively, for investment elsewhere within the company. Required: 1. Calculate the net present value for each project. (4 Marks) 2. Calculate the simple rate of return for each product. (4 Marks) 3. Which of the two projects (if either) would you recommend that Batelco Inc. accept? Why? (2 Mark) Present value (table 148-1) is given below to determine the appropriate discount factor(s) using the tables provided. Period 1 2 3 4 9 6 7 8 6 10 45 09062 0905 0889 0800 0822 0700 0760 0731 0.703 0676 8% 8962 0907 0864 0823 0784 0.746 0.711 0677 0645 0614 Take 148-1 Present Value of $1 Table Summary Table of prosent value $1. Peroch are ded in first column 1-15 6% 7% 8% 10% 11% 0903 0926 0909 0901 0905 0.873 0890 0.857 0806 0812 0040 0816 0794 0.751 0.731 0790 0.703 0735 0683 0.747 0.713 0481 0621 0.705 0.000 D630 0564 0665 0.623 0583 0513 0627 0580 0.500 0467 0592 0544 0500 0424 0556 0508 0403 0306 164 /160 0042 0772 0.700 0650 0.506 0.547 0502 0400 0472 0590 0500 0.535 0400 0434 0301 0352 12% 0890 0797 0712 063 0567 0507 0452 0.404 0.361 0322 13% 0305 0703 0000 0613 0543 0.400 0425 0376 0333 0295 14% 6877 0709 5/90 0502 0519 0456 0.400 0351 0300 0270 10% 087 0.756 0600 05/2 0407 0412 0376 03027 0704 0247 10 points Question 5 Batelco Inc. is considering two mutually exclusive projects A and B. Each project requires an initial investment as presented in the below table. The economic life of the project A will be 5-Year's and Project B will be 6 years, and both projects carry same risk. Batelco Inc uses a discount rate of 12%. After considering the current economic situation Batelco Inc. has set a maximum payback period of 4 years and minimum return on investment (ROI) 18%. A financial analyst, prepared estimates of the annual revenues and costs associated with each project as in the below table: Projects B Projects A 240,000 470,000 Cost of equipment Working Capital needed Overhaul of the equipment in 60,000 80,000 12000 14000 two years Annual revenues and costs: Sales revenues 375,000 300,000 Variable expenses 180,000 90,000 Depreciation expense 48,000 78,333 Fixed out-of-pocket operating 90,000 70,000 costs Life of Project 5 year 6 years. Cost of equipment Working Capital needed Overhaul of the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs Life of Project Projects A 240,000 60,000 12000 375,000 180,000 48,000 90,000 5 year Projects B 470,000 80,000 14000 300,000 90,000 78,333 70,000 6 years Life of Project 5 year 6 years The working capital will be released 5th and 6th, year of the project A and project B respectively, for investment elsewhere within the company. Required: 1. Calculate the net present value for each project. (4 Marks) 2. Calculate the simple rate of return for each product. (4 Marks) 3. Which of the two projects (if either) would you recommend that Batelco Inc. accept? Why? (2 Mark) Present value (table 148-1) is given below to determine the appropriate discount factor(s) using the tables provided. Period 1 2 3 4 9 6 7 8 6 10 45 09062 0905 0889 0800 0822 0700 0760 0731 0.703 0676 8% 8962 0907 0864 0823 0784 0.746 0.711 0677 0645 0614 Take 148-1 Present Value of $1 Table Summary Table of prosent value $1. Peroch are ded in first column 1-15 6% 7% 8% 10% 11% 0903 0926 0909 0901 0905 0.873 0890 0.857 0806 0812 0040 0816 0794 0.751 0.731 0790 0.703 0735 0683 0.747 0.713 0481 0621 0.705 0.000 D630 0564 0665 0.623 0583 0513 0627 0580 0.500 0467 0592 0544 0500 0424 0556 0508 0403 0306 164 /160 0042 0772 0.700 0650 0.506 0.547 0502 0400 0472 0590 0500 0.535 0400 0434 0301 0352 12% 0890 0797 0712 063 0567 0507 0452 0.404 0.361 0322 13% 0305 0703 0000 0613 0543 0.400 0425 0376 0333 0295 14% 6877 0709 5/90 0502 0519 0456 0.400 0351 0300 0270 10% 087 0.756 0600 05/2 0407 0412 0376 03027 0704 0247