A privately-owned housebuilding company in Europe is financed entirely by its two owners and for project appraisal
Question:
A privately-owned housebuilding company in Europe is financed entirely by its two owners and for project appraisal purposes they use a discount rate of 10%. The two owners are considering the company's capital investment programme for the next three years, and have reduced their initial list of projects to four. Details of the projects are as follows:
Project | Immediately (000's) | After 1 year (000's) | After 2 years (000's) | After 3 years (000's) |
A | -300 | +50 | +300 | +350 |
B | -300 | -200 | +400 | +400 |
C | -300 | +150 | +150 | +150 |
D | -100 | -300 | +250 | +300 |
None of the projects can be delayed. All projects are divisible; outlays may be reduced by any proportion and net inflows will then be reduced in the same proportion. No project can be undertaken more than once.
Using the provided template, answer the following questions:
a) Which projects should the compamy undertake if capital for immediate investment is limited to 500 000, but is expected to be available without limit at a cost of 10% per annum thereafter? In your answer, you should outline the order that these projects should be undertaken.
b) What will be the NPV generated as a result of your answer to part a)? When writing answer for NPV, put + signfor positive NPVand - sign for negative NPV.
Project | NPV | Benefit-Cost ratio | Rank |
---|---|---|---|
A | |||
B | |||
C | |||
D |
a) Which projects should Hellenic undertake and in what order should these projects be undertaken ?
b) The total NPV generated from your analysis in part a) will be?