Las Casitas Lodge Peru is one of the well-known luxury resorts in Peru. The company's management is undergoing expansion strategy to cater higher demand in 2023 onward. As part of the strategy, the company is evaluating two independent projects that should be started in mid-2021 in order to be completed in the end of December 2023. In 2020, Las Casitas received new capital injection from strategic investor in London, UK. Next week, the financial manager of Las Casitas Lodge will bring the two project's proposals to the board of directors for their approval. The manager prepares the cost and expected cash flows generating from the project as shown in Table 1.

 

Based on financial manager's calculation, the cost of capital is capped at 10.25%. You are asked to help the manager to evaluate the available projects and make the most appropriate decision that would bring optimal values to the firm. 

Instruction: 

A. Calculate the project's NPV. 

B. Calculate the project's IRR. 

C. What is the decision based on NPV? What is the decision based on IRR? Is there any conflict concerning the decision? 

D. As you are asked to help the financial manager, which project or projects will be accepted based on the calculation? Explain your reasoning.

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Year 0 1 2 3 4 5 6 7 Table 1 Project Cusco A Initial investment of EUR490,000 Cash flow year 1 = EUR120,000 Cash flow year 2 = EUR120,000 Cash flow increased by 10% from the previous year. Cash flow increased by 10% from the previous year. Cash flow increased by 10% from the previous year. Cash flow increased by 10% from the previous year. Cash flow increased by 10% from the previous year. Project Cusco B Initial investment of EUR 600,000 Cash flow year 1 of EUR130,000 Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year. Year 0 1 2 3 4 5 6 7 Table 1 Project Cusco A Initial investment of EUR490,000 Cash flow year 1 = EUR120,000 Cash flow year 2 = EUR120,000 Cash flow increased by 10% from the previous year. Cash flow increased by 10% from the previous year. Cash flow increased by 10% from the previous year. Cash flow increased by 10% from the previous year. Cash flow increased by 10% from the previous year. Project Cusco B Initial investment of EUR 600,000 Cash flow year 1 of EUR130,000 Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year. Cash flow increased by 11% from the previous year.

Answer rating: 100% (QA)

Lets evaluate both projects using the Net Present Value NPV and the Internal Rate of Return IRR as the criteria A Calculate the projects NPV The NPV is calculated using the formula NPV Cash Flow in Ye... View the full answer