Clinton engineering consultants have been engaged in developing four (4) project

Question

Clinton engineering consultants have been engaged in developing four (4) projects on behalf of their client, Kleeps Corporation. However, the project sponsors, Kleeps Corporation have asked their Finance manager to evaluate the 4 projects for their viability before it commits its finances to the projects. The cost of funds for Kleeps Corporation is 4%. REQUIRED: In your capacity as Finance Manager of kleeps Corporation, evaluate the viability of the four (4) projects given that the cash inflows and cash outflows of the projects are as shown below on the Net Present Value basis. Project: A B C D Capital $’000 (Outlay) year 0 (40,000) (40,000) (20,000) (20,000) Cash Inflows1 20,000 400 12,800 0 2 20,000 400 12,800 0 3 100 32,000 400 0 4 100 32,000 400 36,000

Explanation / Answer

We shall find out the NPV of each project as follows:

NPV = Present value of cash inflows - Cash outflows

The project with highest NPV is the best. Projects with negative NPV are not viable.

Hence project A & C are not viabnle. Project B is the most profitable and should be undertaken

Cash Flows Present Value Year A B C D PV Factor @4% A B C D 0 -40000 -40000 -40000 -20000 1 -40000 -40000 -40000 -20000 1 20000 400 12800 0 0.961538462 19230.77 384.62 12307.69 0.00 2 20000 400 12800 0 0.924556213 18491.12 369.82 11834.32 0.00 3 100 32000 400 0 0.888996359 88.90 28447.88 355.60 0.00 4 100 32000 400 36000 0.854804191 85.48 27353.73 341.92 30772.95 NPV -2103.73 16556.06 -15160.5 10772.95

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