Question

In: Finance

Consider the following projects and assume an opportunity cost of capital of 12%.

a. Calculate the Net Present Value (NPV) of each project. Which is to be preferred and why?

(8 marks)

b. If there is a capital constraint in place which limits spending to £10,000, which project or projects should be selected? Support your answer with calculations.

Expert Solution

In the capital budgeting analysis, Net Present Value refers to the discounting method to determine project's profitability. It indicates the difference between present value of cash inflows and present value of cash outflows. Projects having high NPV value are considered good as compared to projects with low NPV.

a)

As per the given information, the company has three project options in which the investment can be made through NPV analysis. Now, the analysis of project A:

Project B's Net Present Value is as below:

Project c's NPV:

Considering the NPVs of all projects, we can say that the project has the maximum NPV value which indicates the effectiveness of this project.

Hence, the company should select this project.

b)

If the company has a capital constraint and it can only invest euro 10,000. Considering this fact, the company can not select the project A. Between C and B, the project B has larger NPV and project C has lesser NPV.

So, the company should select the project B only.

In conclusion, the project A is the best among all projects, but if the company can choose the project B in case of capital constraint.

a) Hence, the company should select this project B.

b) So, the company should select the project B only.

Nabeel answered 1 year ago

A firm is considering the following projects. Its opportunity cost of capital is 12%. Project 0...

A firm is considering the following projects. Its opportunity cost of capital is 12%. Project 0 1 2 3 4 A -8,500 +1,875 +1,875 +4,750 0 B -4,500 0 +4,500 +3,750 +4,750 C -8,500 +1,875 +1,875 +4,750 +8,500 1) What is the payback period on each project? 2) What is the discounted payback period on each project?

Consider the following two projects, and assume a company's cost of capital is 15 percent. Find...

Consider the following two projects, and assume a company's cost of capital is 15 percent. Find the IRR and NPV of each project. Which projects add value to the company? If the company can choose only a single project, which project should it choose? Please show through excel sheets and equations. Year 1 Year 2 Year 3 Year 4 Project 1 -$40 $130 $19 $26 Project 2 -$80 $36 $36 $36

Consider the following three projects; assume 14 percent cost of capital. Period Project A Project...

Consider the following three projects; assume 14 percent cost of capital. Period Project A Project B Project C T=0 ($3,000) ($5,000) ($2,000) T=1 $1,000 $1,500 $900 T=2 $1,200 $1,500 $900 T=3 $1,500 $2,500 $700 T=4 $1,500 $2,500 $700 When you have only $5,000 to support the above projects, which project (or projects) should be chosen under the Profitability Index?

2. Given the following expected cash flows for two projects, and an opportunity cost of capital...

2. Given the following expected cash flows for two projects, and an opportunity cost of capital of 10%, which project is better and why? (10 points) Expected Net Cash Flows Year Project A Project B 0 -$10,000 -$10,000 1 $5000 $0 2 $5000 $0 3 $5000 $8,000 4 $5000 $2,000 3. Given the following expected cash flows for two projects, and an opportunity cost of capital of 8%, which project is better and why? (10 points) Expected Net...

Consider the following two projects. The cost of capital for both projects is 15%. Project Year...

Consider the following two projects. The cost of capital for both projects is 15%. Project Year 0 1 2 3 4 5 Alpha -55,000 15,000 14,000 22,000 30,000 35,000 Gamma -80,000 40,000 30,000 25,000 25,000 20,000 Calculate the IRR for each project and determine which one is better. Calculate the NPV for each project and determine which one is better. Based on profitability index method, which project is better? Overall, which project should be accepted assuming they are mutually exclusive?...

If your opportunity cost of capital is 12%. What is the future value of $500 in...

If your opportunity cost of capital is 12%. What is the future value of $500 in 5 years if it is compounded: a. Annually b. Semi-annually c. Quarterly d. Monthly Why is there a difference in the balances between the investment compounded quarterly to the one compounded annually?

Evaluate the following projects, using the Net Present Value (NPV). Assume a cost of capital of...

Evaluate the following projects, using the Net Present Value (NPV). Assume a cost of capital of 6%. Project A Project B Initial Cash Outflow $200,000 $160,000 Year 1 Cash flow 69,000 80,000 Year 2 Cash flow 71,000 80,000 Year 3 Cash flow 85,000 50,000 Calculate the NPV for each project. Which project would you accept according to the NPV?

Evaluate the following projects, using the net present value criteria. Assume a cost of capital of...

Evaluate the following projects, using the net present value criteria. Assume a cost of capital of 9%. Project M Project N Initial Cash Outflow -$260,000 -$260,000 Year 1 Cash flow 19,000 185,000 Year 2 Cash flow 121,000 85,000 Year 3 Cash flow 185,000 55,000 a. What are the NPVs for the projects and what do these numbers tell you? b. If the projects are independent, which would you accept according to the...

In what sense is the cost of capital an opportunity cost? An opportunity cost to whom?...

In what sense is the cost of capital an opportunity cost? An opportunity cost to whom? And, Is it possible that there could be sources of financing that have a zero cost?

Callaway Associates, Inc. is considering the following mutually exclusive projects. Callaway's cost of capital is 12%....

Callaway Associates, Inc. is considering the following mutually exclusive projects. Callaway's cost of capital is 12%. Project A PROJECT B 0 ($25,000) ($80,000) 1 $44,000 $65,000 2 $34,000 $30,000 3 $14,000 $ 0 4 $14,000 $5,000 a. Calculate each project's NPV and IRR. b. Which project should be undertaken ? Why? a.