Question
The management of Oman Investment Company is currently reviewing the company's investment alternatives for the coming year especially that the overall economic condition is constrained
The management of Oman Investment Company is currently reviewing the company's investment alternatives for the coming year especially that the overall economic condition is constrained due to lockdown of COVID-19 pandemic and reduction in oil prices for many years. Based on economic reports, the likelihood that the recession period will continue is 30%, while the growing period is likely to occur with a probability of 40% given that the remaining expected period will be stable. The company has to choose between four mutually exclusive projects, the outcomes of which depend on the state of the economy. The following estimates have been made:
State of Economy | Recession | Stable | Growing |
Project | NPV (OMR) | NPV (OMR) | NPV (OMR) |
Project (A) | 120,000 | 150,000 | 200,000 |
Project (B) | 80,000 | 12,000 | 160000 |
Project (C) | 100,000 | 140,000 | 190000 |
Project (D) | 180,000 | 12,000 | 190,000 |
The Company also is evaluating project (F) in which it has the following cashflow: Initial Investment of OMR 70,000; variable cost of OMR 5,000 for three years; and cash inflow of OMR 10,000 p.a. These cash inflows arise from selling 1,000 units at OMR10 per unit. The expected risk adjusted rate is 8% while discount rate is 10%.
Based on the above details, the expected value NPV for project (A) is:
Select one:
a.
OMR 161,000
b.
OMR 153,000
c.
OMR 89,000
d.
OMR 116,000
Based on the above details, the expected value NPV for project (D) is:
Select one:
a.
OMR 133,600
b.
OMR 165,000
c.
OMR -133,600
d.
OMR 58,000
Based on the above details, the expected value NPV for project (B) during the stable period is:
Select one:
a.
OMR 48,000
b.
OMR 3,600
c.
OMR 36,000
d.
OMR 63000
Based on details of project (F); the sensitivity of the project to annual cash inflow is
Select one:
a.
-331.48%
b.
-443.25%
c.
4.62%
d.
-462.96%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started