You have just joined the Maarets Group and your boss asks you to review a recent
ID: 2383550 • Letter: Y
Question
You have just joined the Maarets Group and your boss asks you to review a recent analysis that was done to compare three alternstive proposals to enhance the firms manufacting facility. You find that the prior analysis ranked the proposals according to their IRR and recommended the highest IRR option,Proposal A.You are concerned and decide to redo the analysis NPV to determine whether this recommendation was aporopriate. But while you are confident the IRRs were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not included in the report. Here is the informstion you have, all amount in millions of GHS:
Proposal IRR Year 0 Year 1 Year 2 Year3
A 60% -60 30 153 88
B 55% ? 0 206 95
C 50% -100 37 0 204+?
a) which projects would recommend based on the NPV of each proposal if the appropriate cost of capital is 10%?
b) would your recommendation be valid if the company has capital limitation of ghs 285million? explain your answer with appropriate detail.
Explanation / Answer
Since the IRR are computed correctly,
The initial outflow for project A will be = 30/1.6 + 153/1.6^2 + 88/1.8^3 =100 GHS.
Similarly, the outflow for project B will be = 0/1.55 + 206/1.55^2 + 95/1.55^3 = 111.25 GHS.
The outflow for project C will be = 37/1.5 + 0 + 204/1.5^3 =85.11 DHS.
Project A
Year
Inflow
Discounted Cash Flow
0
-100
-100
1
30
27.27272727
2
153
126.446281
3
88
66.11570248
NPV (Project A)
119.8347107
Project B
Year
Inflow
Discounted Cash Flow
0
-111.25
-111.25
1
0
0
2
206
170.2479339
3
95
71.37490609
NPV ( Project B)
130.37284
Project C
Year
Inflow
Discounted Cash Flow
0
-85.11
-85.11
1
37
33.63636364
2
0
0
3
204
153.2682194
NPV (Project C)
101.794583
Therefore, according to NPV project B should be selected as this is having highest positive NPV
Project A
Year
Inflow
Discounted Cash Flow
0
-100
-100
1
30
27.27272727
2
153
126.446281
3
88
66.11570248
NPV (Project A)
119.8347107
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