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Question 5 The Finance Director of A&B Limited is currently reviewing three investment projects. If the company decides to go ahead with these proposals, they
Question 5 The Finance Director of A\&B Limited is currently reviewing three investment projects. If the company decides to go ahead with these proposals, they need to proceed immediately as the projects cannot be delayed. Last year, A\&B Limited took out a large bank loan to fund the expansion of its factory. After the expansion, the investment funds available for this year are limited to HK$800,000. Details of the three proposed projects are given below. Project 1 An investment of HK$320,000 in improving the system used in assessing the health and safety conditions in workplace. The improvement on such system is expected to generate savings in labour costs from reduced staff absences due to work-related illness. Expected savings in labour costs per annum are shown as below: - Project 2 An investment of HK$400,000 to upgrade the online customer ordering system which aims to increase customer satisfaction and reduce head count in the Sales Team. The cost savings are expected to generate a Net Present Value (NPV) of HK$32,600 from this project which will run for 5 years. Project 3 An investment in upgrading the quality control equipment at a cost of HK\$400,000. The equipment can help improve product quality and reduce waste. This project is expected to run for five years and generate a NPV of HK$52,320. A\&B Limited has a cost of capital of 12\%. Ignore the impact of taxation on the appraisal process for the three projects. Required: (A) In order to maximise the financial returns, advise A\&B Limited which project(s) the company should invest under each of the following situations: (i) On the assumption that each of the three projects is divisible; (ii) On the assumption that none of the projects are divisible. Your answers should show which projects to invest in and the total NPV under each of the situations stated in (i) and (ii). Workings must be clearly shown. Note: you are required to calculate the NPV for Project 1. The NPV for Projects 2 and 3 are provided by the question. (10 marks)
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