Question
Reynolds Enterprises has a $30 million capital budget and must make decisions regarding investment projects for the coming year. Projects 1 and 2 are mutually
Reynolds Enterprises has a $30 million capital budget and must make decisions regarding investment projects for the coming year. Projects 1 and 2 are mutually exclusive. Project 3 is independent of the other two. Suppose the cost of capital for Reynolds Enterprises is 15%. (i) Use the information on the Projects 1 and 2 (the mutually exclusive projects) to determine which of them should be accepted on the basis of Net Present Value (NPV). (Marks: 2) (ii) What is the Internal rate of return (IRR) and Profitability Index (PI)? Which of the two mutually exclusive projects should be accepted based on IRR and PI? (Marks: 2) (iii) Briefly explain why NPV, IRR and PI can sometimes produce a different ranking of projects. (Marks: 3) (iv) Suppose Project 3, the independent project also becomes available. Which projects should be accepted by Reynolds Enterprises? Is the better technique in this situation NPV, IRR or PI? Why? (Marks: 3)
| project 1 | proj2 | proj3 | |
| Initial cash outflow | -$15,000,000 | -$30,000,000 | -$15,000,000 |
| Year 1 cash inflow | $12,000,000 | $12,000,000 | $9,100,000 |
| year 2 | $6,000,000 | $10,000,000 | $9,100,000 |
| year 3 | $5,000,000 | $24,000,000 | $9,100,000 |
| NPV | |||
| IRR | |||
| PI |
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Authors: Be Mi Real Estate Store
1st Edition
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