Hi there.

I please need step by step by step help/tutoring on the below to better my understanding on Financial Management. Not only the answers please.

For 2.1 I got:

NPV = Sum of [Cashflows] / (1 + Cost of capital%)^time

NPV for project MD:

= 250 000(1+11%)1+ 200 000(1+11%)2+ 170 000(1+11%)3+ 150 000(1+11%)4+ 130 000(1+11%)5+ 130 000(1+11%)6- 670 000

= (225 225 + 162 324 +124 303 + 98 810 + 77 149 + 69 503 ) - 670 000

= 757 314 - 670 000

= 87 314

(answer should be 87 323)

NPV for project HD:

= 170 000(1+11%)1+ 180 000(1+11%)2+ 200 000(1+11%)3+ 250 000(1+11%)4+ 300 000(1+11%)5+ 550 000(1+11%)6- 94 000

= (153 153 + 146 092 + 146 238 + 164 683 + 178 035 + 294 052) - 94 000

= 1 082 253 - 94 000

= 988 253

(answer should be 142 271)

Based on NPV calculations, both projects yield a positive result. However, Project HD has a higher NPV and should thus be selected.

For 2.2 I got teh following, but am stuck on how to calculate IRR

2.2)

To calculate IRR a trial and error approach will be used for each project respectively.

NPV for project MD @ 11% = 87 314

NPV for project MD @ 15%

= 250 000(1+15%)1+ 200 000(1+15%)2+ 170 000(1+15%)3+ 150 000(1+15%)4+ 130 000(1+15%)5+ 130 000(1+15%)6- 670 000

= (217 391 + 151 229 + 111 778 + 85 763 + 64 633 + 56 203) - 670 000

= 686 997 - 670 000

= 16 997

NPV for project HD @ 11% = 988 253

NPV for project HD @ 15%

= 170 000(1+15%)1+ 180 000(1+15%)2+ 200 000(1+15%)3+ 250 000(1+15%)4+ 300 000(1+15%)5+ 550 000(1+15%)6- 94 000

= (147 826 + 136 106 + 131 503 + 142 938 + 149 153 + 237 780) - 94 000

= 945 306 - 94 000

= 851 306

IRR = NPV - Initial cost

= ?

2.3)

PI = Present value of cashflow/ initial investment

PI for project MD:

= (250 000 + 200 000 + 170 000 + 150 000 + 130 000 + 130 000) / 670 000

= 1 030 000 / 670 000

1.5%

(answer should be 1.3%)

PI for project HD:

= (170 000 + 180 000 + 200 000 + 250 000 + 300 000 + 550 000) / 940 000

= 1 650 000 / 940 000

= 1.8%

(answer should be 1.15%)

As calculations show that the PI for project HD is higher than that for project MD, project HD should be selected.

2.4)

I don't have the IRR thus cannot draw the NPV profile.

2.5)

For mutually exclusive projects, the one with the highest NPV should be chosen. Thus JK Products should undertake project HD.

Question 2 20 Marks JK Products is evaluating an investment in either of two competing projects that will allow the company to eliminate a production bottleneck and meet the growing demand for its products. The company's engineering department narrowed the alternatives down to two -MD and HD. A project specialist developed the following estimates of cash flows for MD and HD over the relevant six-year time horizon. The company has an 11% required return and views these projects as equally risky. Project MD Project HD Initial Outflow (CFO) R670,000 R940,000 Year (t) Cash Inflows (CFt) 1 R250,000 170,000 200,000 180,000 170,000 200,000 4 150,000 250,000 5 130,000 300,000 6 130,000 550,000 Required: 2.1. Calculate the net present value (NPV) of each project, assess its acceptability and indicate which project is best, using NPV. (4) 2.2. Calculate the internal rate (IRR) of each project, assess its acceptability and indicate which project is best, using IRR. (4) 2.3. Calculate the profitability index (PD) of each project, assess its acceptability, and indicate which project is best, using PI. (4) 2.4. Draw the NPV profile project MD and HD on the same set of axes and use this diagram to explain why the NPV and the IRR show differences for these two mutually exclusive projects. Discuss this difference in terms of both the "scale problem" and the "timing problem". (4) 2.5. Which of the two mutually exclusive projects would you recommend that JK Products undertake? Why? (4)