Aurthohin Kajkormo Ltd. (AKL) has two project possibilities for investment and therefore, considering the feasibility of investing $60,000 either in Project X or Y initially.

Aurthohin Kajkormo Ltd. (AKL) plans to take on a project (project X) in shipping industry which will require Tk.60,000 as capital. But after that they expect that they will get back 20,000 in year 1, another 25,000 in year 2, another 30,000 in year 3, After this if they wish to continue with this project then they will have to reinvest a further Tk.100,000 which will give them a constant cash flow annually of Tk.35,000 for eternity. Otherwise, they would have to stop the project without any salvage value.

The second project is in the Ready-Made Garments industry (project Y) which will require an initial investment of Tk.60,000. It will payback 25,000 at the end of each year for foreseeable future with a steady growth rate of 5% Both projects have a weighted average cost of capital of 11%.

What is the Net Present Value of the projects if AKL decides to invest in the projects initially?

Comment on PBP and NPV decision criteria if these projects are mutually exclusive.

Answer rating: 100% (QA)

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