Question
In: Finance
The management of Faulu Limited is contemplating to invest in 8 projects. The capital expenditure during...
- 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.
Solutions
Expert Solution
| 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. | |||||||||||
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