Case Study: Assume that your group is working in Finance Department of a construction company. Your...
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Case Study: Assume that your group is working in Finance Department of a construction company. Your company is considering to invest in a 5-year project. Two options are recommended: Option 1: Build a new ocean-view apartment building on the Gold Coast. Option 2: Build a new residential quarter in the suburban area of Melbourne. Your company's Board of Management (BOM) is very concerned about the capacity to generate shareholder value and increase the return on the recent projects. The BOM has especially requested that your financial team recommend a project evaluation method to address the concern. The table below shows the estimated cash flows available for each option: Initial Investment Cash flow in Year 1 Year 2 Year 3 Year 4 Year 5 Option 1 Commercial building 2,500,000 i. 420,000 560,000 575,000 656,000 700,000 Option 2 Residential block You are required to write a short report to the BOM in order: 1) To select a relevant method among 6 investment criteria for this project from: Net Present Value (NPV), 2,400,000 410,000 530,000 560,000 645,000 720,000 ii. Equivalent Annual Cost (EAC), iii. profitability Index (PI), iv. Internal Rate of Return (IRR), v. Simple Payback Period (SPB), and vi. Discounted Payback Period (DPP) Assume the given discount rate applied for all projects is 12.5% and the company's benchmark of payback is maximum 2.5 years. Your recommendations must include your justification why you choose the specific method based on: a) its pros and cons compared to other methods, b) the BOM's concern of efficiency and c) the financial circumstance of the company. To perform the selected method and present the outcome of your project evaluation and recommendation, should the company choose the Option 1 or 2 for this project? Your justification must include calculation steps and numerical outcomes. Case Study: Assume that your group is working in Finance Department of a construction company. Your company is considering to invest in a 5-year project. Two options are recommended: Option 1: Build a new ocean-view apartment building on the Gold Coast. Option 2: Build a new residential quarter in the suburban area of Melbourne. Your company's Board of Management (BOM) is very concerned about the capacity to generate shareholder value and increase the return on the recent projects. The BOM has especially requested that your financial team recommend a project evaluation method to address the concern. The table below shows the estimated cash flows available for each option: Initial Investment Cash flow in Year 1 Year 2 Year 3 Year 4 Year 5 Option 1 Commercial building 2,500,000 i. 420,000 560,000 575,000 656,000 700,000 Option 2 Residential block You are required to write a short report to the BOM in order: 1) To select a relevant method among 6 investment criteria for this project from: Net Present Value (NPV), 2,400,000 410,000 530,000 560,000 645,000 720,000 ii. Equivalent Annual Cost (EAC), iii. profitability Index (PI), iv. Internal Rate of Return (IRR), v. Simple Payback Period (SPB), and vi. Discounted Payback Period (DPP) Assume the given discount rate applied for all projects is 12.5% and the company's benchmark of payback is maximum 2.5 years. Your recommendations must include your justification why you choose the specific method based on: a) its pros and cons compared to other methods, b) the BOM's concern of efficiency and c) the financial circumstance of the company. To perform the selected method and present the outcome of your project evaluation and recommendation, should the company choose the Option 1 or 2 for this project? Your justification must include calculation steps and numerical outcomes.
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Answer rating: 100% (QA)
To evaluate which project should be recommended well use the Net Present Value NPV method This method is chosen because NPV provides a straightforward ... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-1337395250
15th edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
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