Question

In: Finance

The average annual rate of return for your start up company for the past several years...

The average annual rate of return for your start up company for the past several years has been 20% and has made you rich. To maintain this growth, you are evaluating two projects: the first to expand the production capacity and the second is open a new office. You have developed the following table to compare the two:

Comparison of projects

   Year       Plant Expansion       New Office       Initial Outlay    3,500,000 500,000 1 1,500,000 250,000 2 2,000,000 350,000 3 2,500,000 375,000 4 2,750,000 425,000


a, What is the total cash flow of each project?

b. What is the traditional payback period of each and which would be selected based on this value?

c. What is the discounted payback period of each and which would be selected based on this value?

d. What is the NPV and which would be selected based on this rate?

e. What is the IRR of each project and which would be selected on this rate?

f. What is the PI of each project of each project and which would be selected on this rate?

g. You can only afford to undertake one project. Which one and why

Solutions

Expert Solution

b. based on Traditional payback New Office is recommended as it has lesser Payback period

c. based on discounted payback New Office is recommended as it has lesser discounted payback period

d. based on NPV Plant Expansion is recommended as it has higher NPV

e. based on IRR New Office is recommended as it has higher IRR

f. based on PI New Office is recommended as it has higher PI

g. if you can only afford one project i would suggest to go with plant expansion as it result higher cash flow. even though it is not at par with new office proposal in various parameters. the business will get higher cash inflow in plant expansion.

jeff jeffy answered 3 months ago
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