1) A company is seeking to invest approximately S120 millions in new projects. A

Question

1) A company is seeking to invest approximately S120 millions in new projects. After research three projects are considered candidates for construction. The after tax cash non- discounted cash flow information for the three projects using a ten years operating life is, Initial Investment After tax cash flow (millions) vears 1-10 Project A Project B Project C S60 $110 $80 $18 $22 S15 Assume land, working capital and salvage equal to zero. Initial investment at time zero and yearly cash flow at end of the 10 year plant operation. Draw the three cash flows and calculate the important points for all. Hint: use cumulative cash, interest, and payback period 2) A company is seeking to invest approximately S100 millions in new projects. After research three projects are considered candidates for construction. The after tax cash flow information for the three projects using a ten years operating life is, Initial After tax Land WC Salvage Investment cash flow millions)years 1-10 S10 S15 S20 $12 Project AS50 Project B S100 Project C Assume Initial investment at time zero and yearly cash flow at end of the 10 year plant operation. The minimum discount (interest) rate for the project has been set to 10%. Calculate: NPV (cumulative cash), DPBP (payback period), and DCFROR (interest rate) for each project. Determine which should be preferred $10 S10 $80 |$10 |$10 10

Explanation / Answer

PAYBACK PERIOD

1) ASSUMING VALUE OF LAND, WORKING CAPITAL, SALVAGE VALUE AS ZERO

AS PER GIVEN QUESTION

FOR PROJECT A

INITIAL INVESTMENT = INITIAL INVESTMENT / ANNUAL CASH FLOW

PPA = 60/18 = 3.33

PPB = 110/22 = 5

PPC = 80/15 = 5.33

FOR MACHINE A

YEAR CASH INFLOW CUMULATIVE CASH INFLOW

1 18 18

2 18 36

3 18 54

4 18 72

5 18 90

6 18 108

7 18 126

8 18 144

9 18 162

10 18 180

FOR MACHINE B

YEAR CASH INFLOW CUMULATIVE CASH INFLOW

1 22 22

2 22 44

3 22 66

4 22 88

5 22 110

6 22 132

7 22 154

8 22 176

9 22 198

10 22 220

FOR MACHINE C

YEAR CASH INFLOW CUMULATIVE CASH INFLOW

1 15 15

2 15 30

3 15 45

4 15 60

5 15 75

6 15 90

7 15 105

8 15 120

9 15 135

10 15 150

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