Question

Zain Bottling LLC is planning to launch its own soft drinks. Following a feasibility study two alternate technologies have been tested: the first uses injection of carbonization, the second uses compression. For each alternative there will be an initial outlay. Estimated cash inflows over the first 5 years taking into account the costs of production and the resulting sales is given The initial outlay for the injection technology is OMR 60,000 and for the compression technology it is OMR 75,000. Estimated cash inflows for each project over the next 5 years are

: Injection OMR Year 1 0 Year 2 10000 Year 3 20000 Year 4 20000 Year 5 30000 Compression year 1  35000 year 2 25000 year 3 20000 year 4 10000 year 5 0 It is funded by both debt and equity and currently has a weighted cost of capital (Discount rate) of 5%. Each project is mutually exclusive. Answer the following questions

a. Calculate the payback period and net present value for the compression and injection proposal. Also advice as to which, if any, of these two proposals Zain Bottling LLC should invest in based on the two methods used for evaluating.

b. If Zain Bottling LLC accepted any project as a standard if only the net present value was above 15% of the initial investment, should it change its decision?

c. Critically compare the principles of the payback period and net present value methods including their advantages and disadvantages. Relate the answer to the above case ( 250 words)

d. Both the projects in the above case are mutually exclusive. Which technique would you prefer out of NPV and IRR for mutually exclusive projects and why? ( 300 words)

Answer 1