Question 1

A company has to decide whether to select a project or not. The following information are provided:

• The cost of the capital expenditure involved is $55,500

• Discount rate of the project is 12%,

• Company will have to spend $8,500 on net working capital that will be returned to him at the end of the project

• He will depreciate his capital expenditure using straight line method over the project life.

• The duration of the project is 6 years.

• Tax rate of the project is 18%

• His accountant has forecast a revenue of $ 21,000 annually. The company is expecting $7600 of rent revenue

• Further information is provided:

Supplies expense	$800
Supplies	$1300
Salary expenses	$1400
Unearned Revenue	$6100
Utilities	$ 1050
Rental expenses	$950
Prepaid Rent	$1500

• At the end of the project he will sell the equipment purchased initially [CAPEX] at 5000

• The salvage value of CAPEX is $7500

REQUIRED

1. Calculate the initial investment

2. Calculate each year cash flow

3. Calculate the terminal value of the asset used

4. Calculate the NPV for this project.

5. If a company is faced with two projects

Project A has a NPV of -$2000

Project B has a NPV of -$1500

Which project is the company going to choose? Why?

6. Calculate the Profitability Index [PI]. What is the purpose of calculating PI of projects?

7. Calculate IRR of the project.

8. What does IRR mean and how do we use this to choose a project ?