Question

In: Finance

BLUEBOX LIMITED has reported net income of R54 million for the 2020 financial year. The company...

BLUEBOX LIMITED has reported net income of R54 million for the 2020 financial year.

The company is considering the following divisible projects for the 2021 financial year:

PROJECT

A

B

C

D

E

COST RM

40.0

35.0

50.0

30.0

10.0

NPV RM

7

4.5

7.2

4.8

2.5

PI

BLUEBOX Limited’s cost of capital is 12.5%.

The company has a capital budget of R75m. Its target capital structure is a debt-to-equity ratio of 66.67%.

WHAT IS THE COMBINED NPV AND IN WHICH PROJECTS MUST BE INVESTED IN.

Solutions

Expert Solution

Answer: The problem given in question is related to capital rationing (restriction of capital to be invested).

NPV and Proftibility Index(PI) both are considered measure for investment decision making. In case of capital rationing,PI is a better measure to choose projects compared to NPV. Higher the PI , the more profitable the project is.

Proftibility Index= PV of cash flow / Intial cash outflow

In order to find PV of cash flow,

NPV= PV of cash flow- Initial cash outlay

PV of Cash flow= NPV+Initial Cash Outlay

Calculation and ranking of PI:

Particulars A B C D E
Cost as given [a] 40 35 50 30 10
NPV as given [b] 7 4.5 7.2 4.8 2.5
PV of Cash flow (a+b) is [c] 47 39.5 57.2 34.8 12.5
PI (c/a) 1.17 1.12 1.14 1.16 1.25
PI ranking 2 5 4 3 1

As per the PI ranking, Bluebox with the capital budget of 75m should invest in project E and A with the cost of 10m and 40m respectively to get the best profitibility with the amount invested.

NPV of Bluebox ltd (assuming initial cash outlay Zero)

= 54/(1+1.125) - 0 =48m

Combined NPV if invest in project E and A= 48+ 7 (NPV of A) +2.5 (NPV of E) = 57.5

Conclusion- The combined NPV of Bluebox ltd is is 57.5 and should invest in project E and A.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The following information is for Crane Limited for 2020: Net income for the year $2,230,000 8%...
The following information is for Crane Limited for 2020: Net income for the year $2,230,000 8% convertible bonds issued at par ($1,000 per bond), with each bond convertible into 40 common shares 2,110,000 6% convertible, cumulative preferred shares, $100 par value, with each share convertible into 3 common shares 3,900,000 Common shares (400,000 shares outstanding) 4,000,000 Stock options (granted in a prior year) to purchase 65,000 common shares at $20 per share 850,000 Tax rate for 2020 30% Average market...
The following information is for Crane Limited for 2020: Net income for the year $2,230,000 8%...
The following information is for Crane Limited for 2020: Net income for the year $2,230,000 8% convertible bonds issued at par ($1,000 per bond), with each bond convertible into 40 common shares 2,110,000 6% convertible, cumulative preferred shares, $100 par value, with each share convertible into 3 common shares 3,900,000 Common shares (400,000 shares outstanding) 4,000,000 Stock options (granted in a prior year) to purchase 65,000 common shares at $20 per share 850,000 Tax rate for 2020 30% Average market...
Cox Corporation recently reported EBITDA of $22.5 million and $5.4 million of net income. The company...
Cox Corporation recently reported EBITDA of $22.5 million and $5.4 million of net income. The company has $6 million interest expense and the corporate tax rate is 25 percent. What was the company's depreciation and amortization expense? Show work.
The MBA 802 Company reported 2018 net income of $9 million and depreciation of $3.5 million....
The MBA 802 Company reported 2018 net income of $9 million and depreciation of $3.5 million. The top part of the MBA802’s 2017 and 2018 balance sheets is listed as follows (in millions of dollars).                                                                 2017      2018                   Current assets:                                                                                                                                                                           Cash                                                       $18                 $30      Accounts receivable                                 20                   24       Inventory                                                  10                   11                      Total Current Assets:                  $48                 $65 Current Liabilities: Accrued wages and taxes                    $    5                $11 Accounts payable                                     25                  29                    Other Accrued Liabilities                          18                  25                                       Total Current Liabilities:           $48                $65            What is the 2018 net cash flow from operating activities for the MBA802 Company?...
Pronghorn Company reported 2020 net income of $152,900. During 2020, accounts receivable increased by $13,760 and...
Pronghorn Company reported 2020 net income of $152,900. During 2020, accounts receivable increased by $13,760 and accounts payable increased by $9,604. Depreciation expense was $44,000. Prepare the cash flows from operating activities section of the statement of cash flows. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).) PRONGHORN COMPANY Cash Flow Statement choose the accounting period                                             ...
Globo-Chem Co. reported net sales of $600 million last year and generated a net income of...
Globo-Chem Co. reported net sales of $600 million last year and generated a net income of $132.00 million. Last year’s accounts receivable increased by $17 million. What is the maximum amount of cash that Globo-Chem Co. received from sales last year?
During a recent year, the Corp. reported net income of $25,000. The company also reported the...
During a recent year, the Corp. reported net income of $25,000. The company also reported the following activities: a. Purchased equipment for $6,000 in cash. b. Issued common stock for $1,000 in cash c. Depreciation of equipment was $9,000 for the year More information is presented below. Current year Prior year Assets Cash and cash equivalents $84,000 $48,700 Accounts receivable 53,600 50,000 Inventory 39,600 39,000 Prepaid expenses 5,500 15,000 Equipment 206,000 200,000 Accumulated depreciation (126,700) (117,700) Liabilities Current liabilities      ...
a company has ROE of 22% and last year had $450 million in net income. it...
a company has ROE of 22% and last year had $450 million in net income. it has 200 million shares outstanding and paid a dividend of $.7 per share. what is the company's sustainable growth rate?
Burns Company reported $664.480 million in net income in 2021. On January 1, 2021, the company...
Burns Company reported $664.480 million in net income in 2021. On January 1, 2021, the company had 398 million shares of common stock outstanding. On March 1, 2021, 22.8 million new shares of common stock were sold for cash. On June 1, 2021, the company's common stock split 2 for 1. On July 1, 2021, 6.8 million shares were reacquired as treasury stock. Required: Compute Burns' basic earnings per share for the year ended December 31, 2021. (Round your answer...
For 20Y2, McDade Company reported a decline in net income. At the end of the year,...
For 20Y2, McDade Company reported a decline in net income. At the end of the year, T. Burrows, the president, is presented with the following condensed comparative income statement: McDade Company Comparative Income Statement For the Years Ended December 31, 20Y2 and 20Y1 1 20Y2 20Y1 2 Sales $7,369,600.00 $6,580,000.00 3 Cost of goods sold 2,719,733.00 2,193,333.00 4 Gross profit $4,649,867.00 $4,386,667.00 5 Selling expenses $1,049,600.00 $820,000.00 6 Administrative expenses 658,050.00 535,000.00 7 Total operating expenses $1,707,650.00 $1,355,000.00 8 Income...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT