Project 1,2,3 with a lives of 5 years are being considered with cash flow estima
ID: 2725547 • Letter: P
Question
Project 1,2,3 with a lives of 5 years are being considered with cash flow estimated to be as follows
Suppose that Project 1 and 3 are mutually exclusive, project 2 is contingent on project 1. The budget limit is $180,000.
(a) Develop the matrix of investment alternatives, indicate which one is not feasible, and give reason for the infeasibility
(b) Develop the composite cash flows for the feasible alternatives
(c) Suppose the MARR is 10%, determine the best alternative using Present Worth on total investment.
Project 1 (k$) Project 2 (k$) Project 3 (k$) Investment 70,000 40,000 100,000 Annual Revenue 25,000 19,500 36,000 Annual Cost 5,000 4,500 6,000 Salvage Value 0 10,000 15,000Explanation / Answer
a) The project is said to be not feasible only if it provides the negative returns to the investors, thus
if the NPV (net present value) is less than zero.
As per the NPV computations given below, all projects individually have positive NPV’s and thus all projects are feasible.
Investment Alternatives are as follows with the given budget of $ 180,000.
Alternative 1 - Project 1&3 – total investment required - $ 170,000
Alternative 2 - Project 2&3 – total investment required - $ 140,000
Alternative 3 - Project 1&2 – total investment required - $ 110,000
Of the 3 alternatives, the alternative 2 is not possible because the project 2 is contingent on project 1 which means the project 2 will happen only if project 1 is undertaken.
Hence, Alternative 2 with investment matrix of Project 2&3 is not feasible.
b) Composite cash flows for feasible alternatives 1 & 3.
Alternative 1 – project 1& 3
Project 1 & 3
Particulars
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash flows
50,000
50,000
50,000
50,000
50,000
Salvage value
-
-
-
-
15,000
Total net cash inflows
50,000
50,000
50,000
50,000
65,000
Present value @ 10%
0.909
0.826
0.751
0.683
0.629
Present value ($)
45,450
41,323
37,566
34,151
40,886
Total present value of inflows
199,375
Initial investment (Cash outflow)
170,000
Net present value
29,375
% of return on total investment
17%
Alternative 3 -
Project 1& 2
Particulars
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash flows
35,000
35,000
35,000
35,000
35,000
Salvage value
-
-
-
-
10,000
Total net cash inflows
35,000
35,000
35,000
35,000
45,000
Present value @ 10%
0.909
0.826
0.751
0.683
0.629
Present value ($)
31,815
28,926
26,296
23,905
28,306
Total present value of inflows
139,248
Initial investment (Cash outflow)
110,000
Net present value
29,248
% of return on investment
27%
c) The best alternative is Alternative is Alternative 3 as the net return is 27% which is higher than the alternative 1.
Project 1 & 3
Particulars
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash flows
50,000
50,000
50,000
50,000
50,000
Salvage value
-
-
-
-
15,000
Total net cash inflows
50,000
50,000
50,000
50,000
65,000
Present value @ 10%
0.909
0.826
0.751
0.683
0.629
Present value ($)
45,450
41,323
37,566
34,151
40,886
Total present value of inflows
199,375
Initial investment (Cash outflow)
170,000
Net present value
29,375
% of return on total investment
17%
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