Question

Question 6:
XYZ Construction is considering two projects to develop. The expected cash inflows are
as follows :
Project M Project N
Year 1 10,000 25,000
Year 2 15,000 25,000
Year 3 20,000 25,000
Year 4 25,000 25,000
Year 5 30,000 25,000
Each Project requires an investment of $100,000. A rate of 10% has been selected for the NPV
Analysis.
Required:
a) Calculate the NPV and the Profitability Index and suggest which project should be
recommended based on each method.
b) Explain what the key decisions are a Finance Manager has to take in an
Organization with suitable examples.

Answer 1

Statement showing Cash flows			Project M		Project N
Particulars	Time	PVf 10%	Amount	PV
Cash Outflows	-	1.00	(100,000.00)	(100,000.00)	(100,000.00)	(100,000.00)
PV of Cash outflows = PVCO				(100,000.00)		(100,000.00)
Cash inflows	1.00	0.9091	10,000.00	9,090.91	25,000.00	22,727.27
Cash inflows	2.00	0.8264	15,000.00	12,396.69	25,000.00	20,661.16
Cash inflows	3.00	0.7513	20,000.00	15,026.30	25,000.00	18,782.87
Cash inflows	4.00	0.6830	25,000.00	17,075.34	25,000.00	17,075.34
Cash inflows	5.00	0.6209	30,000.00	18,627.64	25,000.00	15,523.03
PV of Cash Inflows =PVCI				72,216.88		94,769.67
NPV= PVCI - PVCO				(27,783.12)		(5,230.33)
Profitability Index				0.72		0.95
Since NPV is negative none of the project should be accepted
Same since PI is less than 1 , none of the project should be accepted
However Project N is less loss making than project N
Finance manager has to make sure that project is profitable for the company