In: Finance
Expected net cash inflows (including salvage value)
Project |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Initial Oulay |
Sh. “000” |
Sh. “000” |
Sh. “000” |
Sh. “000” |
Sh. “000” |
Sh. “000” |
|
A |
70,000 |
70,000 |
70,000 |
70,000 |
70,000 |
246,000 |
B |
75,000 |
87,000 |
64,000 |
- |
- |
180,000 |
C |
48,000 |
48,000 |
63,000 |
73,000 |
175,000 |
|
D |
62,000 |
62,000 |
62,000 |
62,000 |
180,000 |
|
E |
40,000 |
50,000 |
60,000 |
70,000 |
40,000 |
180,000 |
F |
35,000 |
82,000 |
82,000 |
150,000 |
Projects A and E are mutually exclusive. All projects are believed to be of similar risk to the company's existing capital investments.
Babadeni Ltd. cost of capital is 12% a year.
Required
Using Profitabilty index criteria rank the projects and establish the optimal way of investing the available funds.
Present Value(PV) of Cash Flow: | |||||||||
(Cash Flow)/((1+i)^N) | |||||||||
i=discount rate =Cost of Capital=12%=0.12 | |||||||||
N=Year of Cash Flow | |||||||||
CASH FLOW ANALYSIS OF PROJECTA | |||||||||
IC | Initial Outlay | 246,000 | |||||||
N | Year | 1 | 2 | 3 | 4 | 5 | |||
CF | Cash Inflows | 70,000 | 70,000 | 70,000 | 70,000 | 70,000 | SUM | ||
PV=CF/(1.12^N) | Present Value of Cash Inflow | 62,500 | 55,804 | 49,825 | 44,486 | 39,720 | 252,334 | ||
SUM | Sum of PV of Cash Inflows | 252,334 | |||||||
PI=SUM/IC | Profitability Index=(Sum of PV of Cash Inflows)/(Initial Outlay) | ||||||||
PI=SUM/IC | Profitability Index of Project A= | 1.0257 | |||||||
CASH FLOW ANALYSIS OF PROJECT B | |||||||||
IC | Initial Outlay | 180,000 | |||||||
N | Year | 1 | 2 | 3 | |||||
CF | Cash Inflows | 75,000 | 87,000 | 64,000 | SUM | ||||
PV=CF/(1.12^N) | Present Value of Cash Inflow | 66,964 | 69,356 | 45,554 | 181,874 | ||||
SUM | Sum of PV of Cash Inflows | 181,874 | |||||||
PI=SUM/IC | Profitability Index of Project B= | 1.0104 | |||||||
CASH FLOW ANALYSIS OF PROJECT C | |||||||||
IC | Initial Outlay | 175,000 | |||||||
N | Year | 1 | 2 | 3 | 4 | ||||
CF | Cash Inflows | 48,000 | 48,000 | 63,000 | 73,000 | SUM | |||
PV=CF/(1.12^N) | Present Value of Cash Inflow | 42,857 | 38,265 | 44,842 | 46,393 | 172,357 | |||
SUM | Sum of PV of Cash Inflows | 172,357 | |||||||
PI=SUM/IC | Profitability Index of Project C= | 0.9849 | |||||||
CASH FLOW ANALYSIS OF PROJECT D | |||||||||
IC | Initial Outlay | 180,000 | |||||||
N | Year | 1 | 2 | 3 | 4 | ||||
CF | Cash Inflows | 62,000 | 62,000 | 62,000 | 62,000 | SUM | |||
PV=CF/(1.12^N) | Present Value of Cash Inflow | 55,357 | 49,426 | 44,130 | 39,402 | 188,316 | |||
SUM | Sum of PV of Cash Inflows | 188,316 | |||||||
PI=SUM/IC | Profitability Index of Project D= | 1.0462 | |||||||
CASH FLOW ANALYSIS OF PROJECT E | |||||||||
IC | Initial Outlay | 180,000 | |||||||
N | Year | 1 | 2 |
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