The management of KD Continental are reviewing the companys capital investment options for the coming year, and are considering siH projects.

Project A would cost K290 million now, and would earn the following cash profits.

Yr 1K80 mnYr 2K120 mnYr 3K100 mnYr 4K 60 mn

The capital equipment purchased at the start of the project could be resold for K50 million at the end of the fourth year.

Project B would involve a current outlay of K440 million on capital equipment and K200 million on working capital. The profits from the project would be as follows.

YearSales K' MVariable costs K'MFixed costs K'MProfit K'M1750500100150290060010020034202808060

Fixed costs include an annual charge of K40 million for depreciation. At the end of the third year the working capital investment would be recovered and the equipment would be sold for K50 million.

Project C would involve a current outlay of K500 million on equipment and K150 million on working capital. The investment in working capital would be increased to K210 million at the end of the first year. Annual cash profits would be K180 million for five years, at the end of which the investment in working capital would be recovered.

Project D would involve an outlay of K200 million now and a further outlay of K200 million after one year. Cash profits thereafter would be as follows.

Yr 2K 150 mnYr 3K 120 mnYr 4K 80 mn

Project E is a long-term project, involving an immediate outlay of K320 million and annual cash profits of K45 million in perpetuity.

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

Required:

Evaluate each project using NPV and determine which should be undertaken by the company on financial grounds. (25marks)