Eureka Inc. manufactures a spare part “Brighto”.

During the year 2021, the company is evaluating the three investment alternatives:

Project RED: Produce a new range of products,

Project GREEN: Expansion of its existing product range.

Project BLUE: Develop a new high-quality production plant.

Any of the investment decision shall be implemented from 1^st January 2022.

If only one project is undertaken, the expected investments and cash inflows are as under:

Project	Expected Net Cash Inflows (Including Salvage Value) (Million $)					Initial Outlay (Million $)
	Year 2022	Year 2023	Year 2024	Year 2025	Year 2026
Red Green Blue	60 75 50	69 60 63	70 70 52	60 Nil 75	60 Nil Nil	225 160 175

• If projects Red & Green are jointly undertaken, there shall be no savings in investments required and also the net cash inflows shall remain the same.
• If projects Green and Blue are jointly undertaken, savings are possible only in investment because of the machines acquired can be used in both production processes. The combined investment required for projects Green & Blue is $334 million.
• If projects Red & Blue are jointly undertaken, there are combined savings of $0.5 million each year to be achieved in marketing expenses and production cost of the products but no savings are expected in investments.
• If all the three projects are taken simultaneously, all the savings given above shall be achieved jointly, however, an extra $5 million extension cost for the production plant will be necessary on January 01, 2022, as space and capacity are not available for all three projects.

Eureka Inc.’s WACC is 11½ %.

REQUIREMENT (A): Calculate PBP, DPBP, NPV, PI and IRR for each single project and for each combination of projects, if Tax Rates, Inflation Rates and Salvage values of all projects are Nil. Also, decide which single project or a combination of projects is more beneficial.

REQUIREMENT (B): Calculate PBP, DPBP, NPV, PI and IRR for each single project and for each combination of projects, if Tax Rates and Salvage values of all projects are Nil. The inflation rate for all projects for all years and for all components is 5%. Also, decide which single project or a combination of projects is more beneficial.

REQUIREMENT (C): Calculate PBP, DPBP, NPV, PI and IRR for each single project and for each combination of projects, if Tax Rate is 10% and salvage value is taxable. Salvage Values of Project Red, Green and Blue are $6, $4 and $2 (in millions), respectively. The Inflation Rate is Nil for all projects. Also, decide which single project or a combination of projects is more beneficial.

Answer rating: 100% (QA)

PBP Present Value of Cash Inflows Present Value of Cash Outflows DPBP Discounted Present Value of Cash Inflows Discounted Present Value of Cash Outflo... View the full answer