Question

Question 2 (a)                                                                                               

Choose the most desirable investment proposal from the following alternative proposals using profitability index method:

	Proposal X	Proposal Y	Proposal Z
Present Value of net cashflow (Rs.)	212,000	171,800	185,200
Amount required to invest (Rs.)	200,000	160,000	180,000

(b) AMCO Ltd is considering investing in a high class production plant which will smooth out its production process and will increase production up to 40 %. This production plant needs an initial investment of $ 20 million. The cash flows of $ 3 million, $ 5 million, $ 8 million, $ 9 million are expected to generate from year 1 to 4 respectively. Discount rate is 10 %. Calculate the profitability index of the plant.

(c)   Abcom is considering building either a one-storey (Project A) or five-storey (Project B) block of offices on a prime site. The following information is available:

Year	Initial Investment Outlay	Not Inflow at the Year End
Project |A	-9500	11500
Project B	-15000	18000

Assuming the discount rate to be 10% per annum, which project should Abcom undertake? Use NPV and IRR techniques for the evaluation.

(d) Proposal X and proposal Y require an initial investment of $10,000 and are expected to generate an equal cash inflow of $20,000 over their life of four years. The net cash inflow for each year of life of both the proposals is given below:  

Year	Proposal X ($)	Proposal Y ($)
1	2000	8000
2	4000	6000
3	6000	4000
4	8000	2000
Total	20000	20000

1. Compute the present value of cash inflows generated by both the proposals assuming a discount rate of 18%.

2. Which of the two proposals is better if compared using net present value method?

Answer 1