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 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...

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?

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?

Shell City considers 2 projects using the cost of capital of 12%. Project Sponge: cost $10,000,...

Shell City considers 2 projects using the cost of capital of 12%. Project Sponge: cost $10,000, cash flows of $4,300; $5,200, and $4,700 in 3 years respectively. Project Whale: cost $14,000, cash flows of $5,600; $4,100; $6,500; and $5,300 in 4 years respectively. What is the equivalent ANPV of Project Sponge? $811.26 $1,330.06 $450.68 $553.77 What is the equivalent ANPV of Project Whale? $821.44 $610.52 $745.16 $418.90

What is opportunity cost? As scarce resource, financial capital has opportunity cost. What determines the opportunity...

What is opportunity cost? As scarce resource, financial capital has opportunity cost. What determines the opportunity cost of capital? PLEASE ANSWER THIS QUESTION IN A ESSAY FORMAT!

Consolidated Inc. uses a weighted average cost of capital of 12% to evaluate average-risk projects and...

Consolidated Inc. uses a weighted average cost of capital of 12% to evaluate average-risk projects and adds/subtracts two percentage points to evaluate projects of greater/lesser risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $200,000 and last four years. Project A, which is riskier than average, will produce annual after-tax cash flows of $71,000. Project B, which has less-than-average risk, will produce after-tax cash flows of $146,000 in Years 3 and 4 only. What should...

1.1 A company with a cost of capital of 20% has identified projects with the following...

1.1 A company with a cost of capital of 20% has identified projects with the following cash flows: Year Project C Project D 0 -N$100 000 -N$30 000 1 40 000 10 000 2 45 000 15 000 3 50 000 20 000 4 55 000 25 000 Required 1: a. Calculate the payback period of each project. b. Calculate the NPV and IRR of each project. c. Which project would you accept on basis of NPV? On basis of...