Question
In: Finance
Global company is considering expanding its inter national presence. The company believes that it has great...
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)
Solutions
Expert Solution
| 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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