Consider the following information about four different projects. Each requires an initial outlay of Rs1,000,000 but...

 

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Consider the following information about four different projects. Each requires an initial outlay of Rs1,000,000 but the firm only has funds to undertake one project. The firm has traditionally used a discount rate of 10% to evaluate all its projects. The information regarding four projects are as follows: Cash flows Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 10,000 Performance indicators: Project "Attract' NPV RS 000 ROI (or IRR) % period of years required for the project's future cash flows to Payback number Project "Attract Rs'000 recover its investment (years) 393.92 11.3% 14.20 Project 'Boring' Rs'000 160 200 350 395 432 440 442 444 446 448 450 451 451 452 (2,000) Project Boring 228.22 12.3% 6.05 Project 'Cool' Rs'000 1,200 900 300 90 70 Project 'Cool' 165.04 15.3 1.89 Project 'Dear' Rs'000 (350) (60) 60 350 700 1,200 2,250 Project 'Dear' 182.98 11.4% 6.04 Required: (a) Explain with supporting reasons whether a blanket discount rate of 10% used to evaluate all four projects is a sound financial management practice. (10 marks) (b) Explain, with supporting reasons (no computations are required), which project would have the greatest shareholder value added? (10 marks) Consider the following information about four different projects. Each requires an initial outlay of Rs1,000,000 but the firm only has funds to undertake one project. The firm has traditionally used a discount rate of 10% to evaluate all its projects. The information regarding four projects are as follows: Cash flows Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 10,000 Performance indicators: Project "Attract' NPV RS 000 ROI (or IRR) % period of years required for the project's future cash flows to Payback number Project "Attract Rs'000 recover its investment (years) 393.92 11.3% 14.20 Project 'Boring' Rs'000 160 200 350 395 432 440 442 444 446 448 450 451 451 452 (2,000) Project Boring 228.22 12.3% 6.05 Project 'Cool' Rs'000 1,200 900 300 90 70 Project 'Cool' 165.04 15.3 1.89 Project 'Dear' Rs'000 (350) (60) 60 350 700 1,200 2,250 Project 'Dear' 182.98 11.4% 6.04 Required: (a) Explain with supporting reasons whether a blanket discount rate of 10% used to evaluate all four projects is a sound financial management practice. (10 marks) (b) Explain, with supporting reasons (no computations are required), which project would have the greatest shareholder value added? (10 marks)

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a Whether a blanket discount rate of 10 used to evaluate all four projects is a sound financial management practice A blanket discount rate of 10 is n... View the full answer