Giant Products (GP) Pty Ltd is a multi-product company that focuses on a wide array of...

 

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Giant Products (GP) Pty Ltd is a multi-product company that focuses on a wide array of industrial investment projects. They are currently considering the four projects shown below. Parameters Developmental cost Initial outlay (plant R000 & machinery) Units per year Selling price Operating cost . Units R000 2.1. 2.2. Project P 2000 42 000 2.3. 2.4. 152 000 600 468 2.5. Project Q 1500 28 000 75 400 800 620 Project R 1600 48 000 R/unit Riunit *Developmental costs are costs already incurred for each project. Units selling price and operating cost are constant for the duration of the project. Funds available for investment are limited to R104 million. 86 000 500 240 Other notes: The plant and machinery useful ife is five years. The plant and machinery value are depreciated on a straight-line basis with no salvage value after their useful life. Project S 1200 Working capital for each project is 20% of the expected annual sales. In each case this investment will be made immediately and will be recovered at the end of project life. . The company tax is 30%. The company's cost of capital is estimated to be 16%. 12 000 Calculate the NPV for each project. [12] What are your recommendations, based on the above calculations? [2] 124 000 1000 910 Calculate the profitability index for each project. [4] Which of the new projects, if any, can be undertaken? Your answer should show your preference in descending order, the proportion of scaled-down project and total NPV based on available funds. [8] Discuss the limitations of the profitability index when dealing with capital rationing. [4] Giant Products (GP) Pty Ltd is a multi-product company that focuses on a wide array of industrial investment projects. They are currently considering the four projects shown below. Parameters Developmental cost Initial outlay (plant R000 & machinery) Units per year Selling price Operating cost . Units R000 2.1. 2.2. Project P 2000 42 000 2.3. 2.4. 152 000 600 468 2.5. Project Q 1500 28 000 75 400 800 620 Project R 1600 48 000 R/unit Riunit *Developmental costs are costs already incurred for each project. Units selling price and operating cost are constant for the duration of the project. Funds available for investment are limited to R104 million. 86 000 500 240 Other notes: The plant and machinery useful ife is five years. The plant and machinery value are depreciated on a straight-line basis with no salvage value after their useful life. Project S 1200 Working capital for each project is 20% of the expected annual sales. In each case this investment will be made immediately and will be recovered at the end of project life. . The company tax is 30%. The company's cost of capital is estimated to be 16%. 12 000 Calculate the NPV for each project. [12] What are your recommendations, based on the above calculations? [2] 124 000 1000 910 Calculate the profitability index for each project. [4] Which of the new projects, if any, can be undertaken? Your answer should show your preference in descending order, the proportion of scaled-down project and total NPV based on available funds. [8] Discuss the limitations of the profitability index when dealing with capital rationing. [4]

Answer rating: 100% (QA)

To calculate the Net Present Value NPV for each project we need to discount the cash flows from each project to their present value using the companys cost of capital The NPV is then calculated by sub... View the full answer