Question 6:

XYZ Construction is considering two projects to develop. The expected cash inflows are

as follows :

Project M Project N

Year 1 10,000 25,000

Year 2 15,000 25,000

Year 3 20,000 25,000

Year 4 25,000 25,000

Year 5 30,000 25,000

Each Project requires an investment of $100,000. A rate of 10% has been selected for the NPV

Analysis.

Required:

a) Calculate the NPV and the Profitability Index and suggest which project should be

recommended based on each method.

b) Explain what the key decisions are a Finance Manager has to take in an

Organization with suitable examples.