You are in charge of making investment decisions in your company. You are presen

Question

You are in charge of making investment decisions in your company. You are presented with the following three projects: 8. Building a Warehouse Buying a machine Capital Cost $3,945,500 Purchasing a Plant Capital cost $3,150,000 Net Cash inflows Year 1 $630,800 Year 2 $1,352,250 Year 3 $1,320,540 Year 4 $1,005,350 Capital Cost $2,980,000 Net Cash inflows Year 1 $725,000 Year 2 S1,615,300 Year 3 $1,425,000 Year 4 $1,525,450 Net Cash inflows Year 1 $715,325 Year 2 $1,342,100 Year 3 S1,101,180 Year 4 $875,675 If your company expects a 10% rate of return on its investment, compute the NPV of each project ) Which one of the project Gif any) will you recommend to your company (ii) Why would you recommend the selected project? (5 marks) (5 marks) F6 F1 F2 F3

Explanation / Answer

Purchasing Plant Cash Flow PV factor 10% PV of Cash Flow 0 -3150000 1 -3150000 1 630800 0.909090909 573454.55 2 1352250 0.826446281 1117561.98 3 1320540 0.751314801 992141.25 4 1005350 0.683013455 686667.58 NPV 219825.35 Building A warhouse Cash Flow PV factor 10% PV of Cash Flow 0 -3945500 1 -3945500 1 725000 0.909090909 659090.91 2 1615300 0.826446281 1334958.68 3 1425000 0.751314801 1070623.59 4 1525450 0.683013455 1041902.88 NPV 161076.05 Buying a Machine Cash Flow PV factor 10% PV of Cash Flow 0 -2980000 1 -2980000 1 715325 0.909090909 650295.45 2 1342100 0.826446281 1109173.55 3 1101180 0.751314801 827332.83 4 875675 0.683013455 598097.81 NPV 204899.65 I recommend Purchasing Plant   because NPVis Higher

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