Question

Global company is considering expanding its inter national presence. The company believes that it has
great potential for international sales. Recently, 20% of the Global Companys sales were in foreign
markets. The goal is to expand the foreign sales to 30%. In order to accomplish this goal, the company
needs to invest heavily.
After considering tax, marketing, labour and political issues the company has decided to invest in 1India
and Dubai. The following estimates have been provided:
India
Dubai
Initial investment
$2,500,000
20 years
$500,000
$200,000
$550,000
$222,250
$500,000
$1,400,000
20 years
$380,000
$180,000
$430,000
$206,350
$o.00
Estimated useful life
Annual revenues (accrual)
Annual expenses (accrural)
Annual cash inflows
Annual cash outflows
Estimated salvage value
Discount rate
9%
9%
Required:
Evaluate both these mutually exclusive proposals using:
1) The cash payback period
2) The net present value (NPV)
Using the same information as in question 5, answer the following questions:
Required:
Evaluate both these mutually exclusive proposals using:
1) Profitability index
2) Internal rate of return (IRR)

Answer 1

Ans 1	Cash payback period for INDIA
	Payback period =	2500000/(550000-222250)
			7.63	year
	Cash payback period for DUBAI
	Payback period =	1400000/(430000-206350)
			6.26	year
	Since Dubai has lower payback period therefore as per payback period Dubai should be accepted
Ans 2	Computation of NPV
	i	ii	iii	iv	v=ii*iv	vi=iii*iv
		Cash flow		Present value
	Year	India	Dubai	PVIF @ 9%	India	Dubai
	0	-2500000	-1400000	1	(2,500,000.00)	(1,400,000.00)
	1	327750	223650	0.917431193	300,688.07	205,183.49
	2	327750	223650	0.841679993	275,860.62	188,241.73
	3	327750	223650	0.77218348	253,083.14	172,698.84
	4	327750	223650	0.708425211	232,186.36	158,439.30
	5	327750	223650	0.649931386	213,015.01	145,357.15
	6	327750	223650	0.596267327	195,426.62	133,355.19
	7	327750	223650	0.547034245	179,290.47	122,344.21
	8	327750	223650	0.50186628	164,486.67	112,242.39
	9	327750	223650	0.46042778	150,905.20	102,974.67
	10	327750	223650	0.422410807	138,445.14	94,472.18
	11	327750	223650	0.38753285	127,013.89	86,671.72
	12	327750	223650	0.355534725	116,526.51	79,515.34
	13	327750	223650	0.326178647	106,905.05	72,949.85
	14	327750	223650	0.299246465	98,078.03	66,926.47
	15	327750	223650	0.274538041	89,979.84	61,400.43
	16	327750	223650	0.251869763	82,550.31	56,330.67
	17	327750	223650	0.231073177	75,734.23	51,679.52
	18	327750	223650	0.21199374	69,480.95	47,412.40
	19	327750	223650	0.19448967	63,743.99	43,497.61
	20	827750	223650	0.17843089	147,696.17	39,906.07
		NPV			581,096.29	641,599.24
		NPV india =	581,096.29
		NPV dubai=	641,599.24
		Since dubai has higher NPV therefore same should be accepted
Ans 3	Profitability index India =	(581096.29+2500000)/2500000	1.23
	Profitability index Dubai =	(641599.24+1500000)/1400000	1.46
	Based on PI = Dubai should be selected
Ans 4	IRR using excel function
	IRR India		12.00%
	IRR dubai	15.00%
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