Petram is a company that manufactures aircraft parts. The company is considering various investment projects that may improve operational efficiency, and has already spent £30,000 gathering relevant data. It has now shortlisted three projects and asked you to recommend the best option. You have been provided with the following information about the projects: • Project I will last for 4 years. The initial outlay is £950,000 and the forecast operating cash inflow from the project is £350,000 for the first 2 years, £425,000 in year 3 and £150,000 in the last year. Annual depreciation expense associated with this project is £237,500. • Project II will last for 4 years. The initial outlay is £1,150,000 and the forecast operating cash inflow from the project is £550,000 in the first year and £350,000 for the following three years. Annual interest expense associated with this project is L45,000. · Project III will last for 4 years. The initial outlay is £850,000 and the forecast operating cash inflow from the project is £250,000 in the first year, then increasing by £40,000 each year in years 2, 3, and 4. The firm's cost of capital is 10% per year. Required: (a) Evaluate each of the three projects using Payback Period. Evaluate each of the three projects using Net Present Value.
Petram is a company that manufactures aircraft parts. The company is considering various investment projects that may improve operational efficiency, and has already spent £30,000 gathering relevant data. It has now shortlisted three projects and asked you to recommend the best option. You have been provided with the following information about the projects: • Project I will last for 4 years. The initial outlay is £950,000 and the forecast operating cash inflow from the project is £350,000 for the first 2 years, £425,000 in year 3 and £150,000 in the last year. Annual depreciation expense associated with this project is £237,500. • Project II will last for 4 years. The initial outlay is £1,150,000 and the forecast operating cash inflow from the project is £550,000 in the first year and £350,000 for the following three years. Annual interest expense associated with this project is L45,000. · Project III will last for 4 years. The initial outlay is £850,000 and the forecast operating cash inflow from the project is £250,000 in the first year, then increasing by £40,000 each year in years 2, 3, and 4. The firm's cost of capital is 10% per year. Required: (a) Evaluate each of the three projects using Payback Period. Evaluate each of the three projects using Net Present Value.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 26P
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Transcribed Image Text:Question 21
Petram is a company that manufactures aircraft parts. The company is considering
various investment projects that may improve operational efficiency, and has already
spent £30,000 gathering relevant data. It has now shortlisted three projects and
asked you to recommend the best option. You have been provided with the
following information about the projects:
- Project I will last for 4 years. The initial outlay is £950,000 and the forecast
operating cash inflow from the project is £350,000 for the first 2 years, £425,000
in year 3 and £150,000 in the last year. Annual depreciation expense associated
with this project is £237,500.
- Project II will last for 4 years. The initial outlay is £1,150,000 and the forecast
operating cash inflow from the project is £550,000 in the first year and
£350,000 for the following three years. Annual interest expense associated with
this project is £45,000.
- Project III will last for 4 years. The initial outlay is £850,000 and the forecast
operating cash inflow from the project is £250,000 in the first year, then
increasing by £40,000 each year in years 2, 3, and 4.
The firm's cost of capital is 10% per year.
Required:
(a) Evaluate each of the three projects using Payback Period.
Evaluate each of the three projects using Net Present Value.
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