Quentin, a Financial Manager, has been approached by five different subsidiaries cach ofwhom are recommending investment in a new business line. Quentin has estimated therelevant cash flows in the table below and is presenting his results to the Board for approval.For each project he has estimated the present value of the cost of the project and also thepresent value of future income flows. The five projects are all divisible and the companyuses 12% as the discount rate for projects of this nature.ProjectCost (£)240,000330,000270,000375,000210,000PV (£)315,000343,500390,000345,000300,000BDa)Explain the differences and similarities between net present value (NPV) and theprofitability index (P).Calculate the profitability index for each of the five projects and rank the projects inthe order of preference that would maximise shareholders wealth.b)c)Calculate the NPV for each of the five projects and rank the projects in the order ofpreference that would maximise sharcholders wealth.Assume that the Board has limited total investment to £1,200,000. Which, if any,projects would you recommend for investment? Explain your answer.d)

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Quentin, a Financial Manager, has been approached by five different subsidiaries cach of whom are recommending investment in a new business line. Quentin has estimated the relevant cash flows in the table below and is presenting his results to the Board for approval. For each project he has estimated the present value of the cost of the project and also the present value of future income flows. The five projects are all divisible and the uses 12% as the discount rate for projects of this nature. company Project Cost (£) 240,000 330,000 270,000 375,000 210,000 PV (£) 315,000 343,500 390,000 345,000 300,000 C D E a) Explain the differences and similarities between net present value (NPV) and the profitability index (PI). Calculate the profitability index for cach of the five projects and rank the projects in the order of preference that would maximise shareholders wealth. b) Calculate the NPV for cach of the five projects and rank the projects in the order of preference that would maximise sharcholders wealth. c)

Quentin, a Financial Manager, has been approached by five different subsidiaries cach of whom are recommending investment in a new business line. Quentin has estimated the relevant cash flows in the table below and is presenting his results to the Board for approval. For each project he has estimated the present value of the cost of the project and also the present value of future income flows. The five projects are all divisible and the uses 12% as the discount rate for projects of this nature. company Project Cost (£) 240,000 330,000 270,000 375,000 210,000 PV (£) 315,000 343,500 390,000 345,000 300,000 C D E a) Explain the differences and similarities between net present value (NPV) and the profitability index (PI). Calculate the profitability index for cach of the five projects and rank the projects in the order of preference that would maximise shareholders wealth. b) Calculate the NPV for cach of the five projects and rank the projects in the order of preference that would maximise sharcholders wealth. c)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 1P

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