Question

1. The management of Faulu Limited is contemplating to invest in 8 projects. The capital expenditure during the year has been rationed to sh.500,000 and the projects have equal risk and should be discounted at the firm’s cost of capital of 10%

Project	Cost (sh.)	Project life (years)	Cash flow per year (sh.)
A B C D E F G H	400,000 50,000 100,000 75,000 75,000 50,000 250,000 250,000	20 10 8 15 6 5 10 3	58600 55000 24000 12000 18000 14000 41000 99000

Required:

Determine the optimal investment sets.                    

Answer 1

Calculation of NPV
Particulars	A	B	C	D	E	F	G	H		YEAR	DISCOUNT FACTOR
Cash Flow	58600	55000	24000	12000	18000	14000	41000	99000		1	0.909090909
										2	0.826446281
PVIFA(10%,20)	8.51									3	0.751314801
PVIFA(10%,10)		6.144567								4	0.683013455
PVIFA(10%,8)			5.334926							5	0.620921323
PVIFA(10%,15)				7.60608						6	0.56447393
PVIFA(10%,6)					4.355261					7	0.513158118
PVIFA(10%,5)						3.790787				8	0.46650738
PVIFA(10%,10)							6.144567			9	0.424097618
PVIFA(10%,3)								2.486852		10	0.385543289
										11	0.350493899
										12	0.318630818
PV	498894.8	337951.2	128038.2	91272.95	78394.69	53071.01	251927.3	246198.3		13	0.28966438
										14	0.263331254
COST	400000	50000	100000	75000	75000	50000	250000	250000		15	0.239392049
										16	0.217629136
NPV	98894.83	287951.2	28038.23	16272.95	3394.693	3071.015	1927.251	-3801.65		17	0.197844669
										18	0.17985879
										19	0.163507991
										20	0.148643628
Conclusion
As Highest NPV is in Project A, 400000 shall be invested in Project A
Second highest NPV is in Project B, 50000 shall be invested in Project B
Third highest NPV is in project C, 50000 shall be invested in project C.