A) Synergy Industries is expanding its product line and its production capacity.

Question

A) Synergy Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm typically uses a discount rate of 15 percent. [ 25 marks ] Year Cash Flow (A) Cash Flow (B) - $317,000 1 2 3 4 $27,700 $56,ooo $55,ooo $399,ooo - $26,500 $9,057 $10,536 $11,849 $13,814 1. 2. Calculate the NPV of both the projects. Calculate the IRR 3. Calculate the Profitability index 4. Should both projects be accepted? Or either? Or neither? Explain your reasoning

Explanation / Answer

1. NPV & 3. PI &4. decision

4. IRR: project A=16.438% for project B= 23.44%

at those rates NPV of projects are 0.

since IRR is greater than 15% , projects can be accepted.

Ref Particulars Project A Project B Present value of annual cash inflows                         3,30,724                             31,531 Present value of terminal cashflows                                      -   A Total present value of future cash inflows                         3,30,724                             31,531 B Less: present value of initial cashflows                         3,17,000                             26,500 C=A-B Net present value                             13,724                               5,031 D=A/B Profitability index 1.04 1.19 Decisition Äccept Äccept Reason As NPV is positive project is accepted As NPV is positive project should be accepted

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