Question

Select any engineering company and assume you are an engineering manager working in that company. Your department has been awarded an external grant of $1M to select 1 project of your choice. You have identified 5 mutually exclusive projects to choose from. However, you can only select one and you have decided to select the 1 project by using NPV-based analysis. For this question, you do not have to calculate NPV or show any calculations.

(a) List your 5 hypothetical project choices with hypothetical NPV values.

(b) Select your 1 project and explain why you have selected that project.

(c) Explain the value of using NPV for such economic analysis.

Answer 1

In capital budgeting, mutually-exclusive projects refer to a set of projects out of which only one project can be selected for investment. A decision to undertake one project from mutually exclusive projects excludes all other projects from consideration.

The list of 5 Mutually exclusive projects are as follow

Cost of project 1 million

EXPECTED CASHFLOWS OF THE PROJECT (FIGURES IN 1000)

Year	Project X	Project Y	Project Z	Project A	Project B
1	200	600	150	300	350
2	300	500	550	310	350
3	400	400	250	320	350
4	500	300	300	330	350
5	600	200	400	340	350

The Company has a target of return of capital of 10%

I would prefer Project Y

As the cash flow of the project Y in initial year is high thus that would result in highest NPV amongst all the project

Here all the projects give positive NPV but Project Y woild give highest positive NPV thats why I would select it

The importance of NPV is as follow

1) Net present value method is that method which  is based on the idea that dollars received in the future are worth less than dollars in the bank today. Cash flow from future years is discounted back to the present to find their worth.

2) The NPV method produces a dollar amount that indicates how much value the project will create for the company. Stockholders can see clearly how much a project will contribute to their value.

3) The calculation of the NPV uses a company's cost of capital as the discount rate. This is the minimum rate of return that shareholders require for their investment in the company