Question 2 (35 marks)

Microfinance Company Alfa Cash Capital had financial problems recently. According to independent auditors' report, the main sources of the problems were a shortage of financial analyses and ignorance of capital budgeting issues. To address the issues, the founders of the company created a financial council that will be in charge of the company's financial analyses. Members of the council are new people with various financial backgrounds, and they decided to make in-depth analyses of every proposed project.

ALFA Cash Capital is considering a long-term investment of $500,000 for 15 years. The required rate of return is 15 percent. Since the council thinks that 15 years is quite a long time-period it made the following decision rules for acceptable of investment project: (a) NPV should be positive; (b) pay-back period should be maximum of 8 years; and (c) the PI should be close to 5 percent.

The company is offered two investment projects for consideration:

	Project 1	Project 2
Initial Outlay	-$500,000	-$500,000
Inflow year 1	$40,000	$90,000
Inflow year 2	$80,000	$90,000
Inflow year 3	$50,000	$90,000
Inflow year 4	$50,000	$90,000
Inflow year 5	$70,000	$90,000
Inflow year 6	$40,000	$90,000
Inflow year 7	$75,000	$90,000
Inflow year 8	$102,000	$90,000
Inflow year 9	$109,000	$90,000
Inflow year 10	$110,000	$90,000
Inflow year 11	$140,000	$90,000
Inflow year 12	$500,000	$90,000
Inflow year 13	$75,000	$90,000
Inflow year 14	$79,000	$90,000
Inflow year 15	$100,000	$90,000

Answer rating: 100% (QA)

Lets calculate the NPV payback period and profitability index PI for both Project 1 and Project 2 based on the given cash flows and criteria Project 1 The required rate of return is 15 Calculating the ... View the full answer