Question 2 Mastermind Investments is a sovereign wealth fund focused on investin
ID: 2466888 • Letter: Q
Question
Question 2
Mastermind Investments is a sovereign wealth fund focused on investing in renewable energy projects. The firm uses an 8.50% discount rate for its investments. Recently Mastermind Investments has two potential projects on hand, code-named Project Sol and Project Ventus. The estimated future after-tax cash flows of the two projects are shown in Table 2.1. Mastermind Investments is now deciding which one it should invest in.
Table 2.1
Answer the following questions:
a If Mastermind Investments uses the net present value (NPV) method, which project would it choose?
b Would the decision be the same if the equivalent annual annuity (EAA) method was used? Show your calculation.
c Based on your answers to parts (a) and (b), what problem has the company encountered in selecting mutually exclusive projects? Which project should Mastermind Investments choose?
After Tax Cash flow($) After Tax Cash flow($) Year Project Sol Project Ventus 0 -5,000,000 -5,000,000 1 900,000 1,200,000 2 900,000 1,600,000 3 900,000 2,000,000 4 1,200,000 5 1,200,000 6 800,000 7 800,000 8 800,000Explanation / Answer
Solution:
NPV Calculation 0 1 2 3 4 5 6 7 8 Initial Investment -5,000,000 Cash inflows 900,000 900,000 900,000 1,200,000 1,200,000 800,000 800,000 800,000 PVIF @ 8.5% 0.922 0.849 0.783 0.722 0.665 0.613 0.565 0.521 Present value of cashflows 829,493.09 764,509.76 704,617.29 865,889.14 798,054.51 490,356.07 451,941.08 416,535.56 Total present value of cashflows 5,321,396.49 NPV= Total present value of cash inflows - initial investment 321,396Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.