You work for a company, which expects to earn at least 7 percent on its projects. The
Question:
You work for a company, which expects to earn at least 7 percent on its projects. The cash flow information for 4 potential projects is described below. Which of the projects would you fund if the decision is based only on financial information? What other information would you need to make such a decision? Why? Would an organization ever take on a project with negative NPV? If so why?
1) Project ALPHA: This project requires an initial investment of $1,000,000 at the project initiation, plus an estimated $75,000 in each of the following 5 years. Project revenues will begin in year 4, estimated at $250,000 in year 4, $350,000 in year 5 and $450,000 in years 6 through 8.
2) Project BETA: Project Beta requires investment of $500,000 at initiation, and then an estimated $350,000, $250,000, and $150,000 in the following 3 years, respectively. Annual revenues of $225,000 will begin to flow in starting in year 5 - for 10 years in total.
3) Project GAMMA: This project will require an initial investment of $250,000 at the project initiation, plus an estimated $450,000, $565,000 and $325,000 in each of the following years, respectively. The payout for this project will be a lump sum of $1,873,000 in year 4.
4) Project DELTA: Project Delta is a 15 year project that requires an initial investment of $350,000. Annual costs in each of the following years of $75,000 will be offset by annual revenues of $114,000 in each of those years.
Financial Accounting An Introduction to Concepts, Methods and Uses
ISBN: 978-1133591023
14th edition
Authors: Roman L. Weil, Katherine Schipper, Jennifer Francis