'Rever Ltd.' is a manufacturing company dealing in Juice. It has been consistently earning good profits for many years. This year too, it has been able to generate enough profits. There is availability of enough cash in the company and good prospects for growth in future. This is partly due to the company's good investment and credit policy. It is a well-managed organization and believesinquality,equalemploymentopportunitiesandgoodremunerationpractices. Ithasmany shareholders who prefer to receive a regular income from their investments.

It has taken a loan from UDB. This loan is to be used by the manager to either invest in project A or B; with project A taking 200 millions and project B taking 500 millions as initial investment and the two projects are expected to generate annual net cash flows as shown below;

Project A B Initial investment UGX 200M UGX 500M Annual Net cash Flow (ANCF)

1 100M 200M

2 100M 200M

3 100M 200M

4 100M 200M

5 100M 200M

a) what nature of financial management decision is the manager required to take in deciding which project to invest in? (2 marks)

b) What is the significance of the decision that the manager has to take in Q.1. (a) above in financial management? (5 marks)

c) Take a decision on the choice of the project to invest in on the basis of:

(i) Payback period of the two projects (8 marks) (ii) Net present value of the two projects at a 20% discount rate (10 marks)

Answer rating: 100% (QA)

a The manager is required to make a capital budgeting decision specifically a project selection decision The manager needs to choose between investing ... View the full answer