The management of Greenwall Co$.$ are reviewing the company$$s capital investment options for the upcoming year and are considering $6$ projects.

a$)$ Project Land would cost $$29,000$ now and would earn the following cash profits.

$1$st year $$8,000$

$2$nd year $$12,000$

$3$rd year $$10,000$

$4$th year $$6,000$

The capital equipment purchased at the start of the project could be resold for $$5,000$ at the start of the $5$th year.

b$)$ Project Water would involve a current outlay of $$44,000$ on capital equipment and $$20,000$ on working capital. The profits from the project would be as follows.

Year Sales $($$$)$ Variable costs $($$$)$ Contribution $($$$)$Fixed costs $($$$)$ Profit $($$$)$

$175,00050,00025,00010,00015,000$

$290,00060,00030,00010,00020,000$

$342,000028,00014,0008,0006,000$

Fixed costs would include an annual charge of $$4,000$ for depreciation. At the end of $3$rd year, the working capital investment could be recovered and the equipment can be sold for $$5,000.$

c$)$ Project Seed would involve a current outlay of $$50,000$ on equipment and $$15,000$ on working capital. The investment in the working capital would be increased to $$21,000$ at the end of $1$st year. Annual cash profits would be $$18,000$ for $5$ years, at the end of which investment in working capital could be recovered.

d$)$ Project Sunlight would involve an outlay of $$20,000$ now and a further outlay of

$$20,000$ after one year. Cash profits of hereafter would be as follows.

$2$nd year $$15,000$

$3$rd year $$12,000$

$4$th to $8$th year $$8,000$ pa

e$)$ Project Leaf is a long$-$term project, involving an immediate outlay of $$32,000$ and annual cash profits of $$4,500$ in perpetuity.

f$)$ Project Flower is another long$-$term project, involving an immediate outlay of $$20,000$ and annual cash profits as follows:

$1$st to $5$th years $$5,000$

$6$th to $10$th years $$4,000$

The company discounts all projects of ten years duration or less at a cost capital of $12\%$ and all other projects at a cost of $15\%.$

Required:

$1.$ Calculate the NPV of each project, and determine which should be undertaken by the company on financial grounds.

$2.$ Calculate the IRR of projects Land, Seed and Leaf.

$3.$ Calculate the profitability index associated with each of the $6$ projects and rank the projects accordingly. Is there a change with PI and NPV methods? If there is$,$ which one would you rather choose as most appropriate and why?

$4.$ Greenwall Co$.$ is considering whether to lease or buy an asset. The financial

controller has been researching the costs involved with borrowing from the bank

to buy the asset outright. The bank will charge interest at $7\mathrm{.}15\%$ per annum. The

asset will cost $$500,000$ and will attract tax allowable depreciation on a straight$-$line basis over five years, which is the useful economic life of the asset. There is

no residual value. Greenwall Co is subject to corporation tax at $30\%,$ payable in

the year in which the profit is earned. What is the NPV of buying option? Note that

you must use post$-$tax cost of debt as your discount rate for calculating NPV$.$

$5.$ For Project Water, can you find the sensitivity of the project in $\%$ to changes in $2$ variables $-$ Sales and Variable costs.

$6.$ Consider Project Flower, if the discount rate provided and applicable for the Project is a nominal rate and the cash flows presented are real cash flows, and if inflation is $7\%,$ what will be the NPV then? What has changed?