Air Bike Inc is planning to establish a new European regional head office. The two options are
Question:
Air Bike Inc is planning to establish a new European regional head office. The two options are Guildford (UK) and Groningen (NL). Below are the cash flows associated with the two projects. Assume all cash flows happen at the end of each year. Air Bike requires a rate of return of 10% on all its investments.
Year | Cash Flow in USD (Guildford) | Cash Flow in USD (Groningen) |
0 | -500,000 | -630,000 |
1 | 120,000 | 250,000 |
2 | 140,000 | 210,000 |
3 | 380,000 | 190,000 |
4 | 100,000 | 160,000 |
5 | -85,000 | 1,000 |
a) If Air Bike uses the net present value criterion to compare these two projects, which one would they accept? Explain your answer with calculations (to the nearest USD1).
b) Calculate the IRR of the Groningen-based project to the nearest 0.1%.
c) Net present value is commonly known as the golden rule for investment appraisal. Discuss why NPV is the most important investment appraisal method compared to other criteria.
Expert Answer:
Answer Solution a Below is the formula to calculate the NPV of the project I NPVVPViPVo where PViTodays value of the expected cash flows PVoTodays val... View the full answer
