Question 1 Capital Projects Plc is considering expanding their production capacity within their business of paper...

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Question 1 Capital Projects Plc is considering expanding their production capacity within their business of paper and packaging. They have produced the expected cash outflows and inflows for each of the machines that they are considering. They have asked you to calculate NPV and IRR for each machine. Each machine requires an initial outlay of 120 million while machine B requires additional net investment in 2 years' time of 90 million. The company's cost of capital is 15%. The Managing Director has also heard there are two types of 'Capital Rationing' and is keen to know what they are and how they might influence the Investment selection decision. Machine A () Machine B () Year O (120 million) Year 1 54 million Year 2 64 million Year 3 64 million (120 million) 97 million (90 million) 87 million Year 4 64 million 87 million Year 5 64 million 27 million Present Value Factor (15% ) Present Value Factor (50%) Year 1 0.8696 0.6667 Year 2 0.7561 0.4444 Year 3 0.6575 0.2963 Year 4 0.5718 0.1975 Year 5 0.4972 0.1317 Required: a) Calculate NPV and IRR for each machine (10 marks) b) Advise the firm if there is no capital rationing which project(s) to select. (5 marks) c) Explain to the Managing Director the two types of Capital Rationing and how Capital Rationing might affect the selection decision (10 marks) Total 25 Marksl Question 1 Capital Projects Plc is considering expanding their production capacity within their business of paper and packaging. They have produced the expected cash outflows and inflows for each of the machines that they are considering. They have asked you to calculate NPV and IRR for each machine. Each machine requires an initial outlay of 120 million while machine B requires additional net investment in 2 years' time of 90 million. The company's cost of capital is 15%. The Managing Director has also heard there are two types of 'Capital Rationing' and is keen to know what they are and how they might influence the Investment selection decision. Machine A () Machine B () Year O (120 million) Year 1 54 million Year 2 64 million Year 3 64 million (120 million) 97 million (90 million) 87 million Year 4 64 million 87 million Year 5 64 million 27 million Present Value Factor (15% ) Present Value Factor (50%) Year 1 0.8696 0.6667 Year 2 0.7561 0.4444 Year 3 0.6575 0.2963 Year 4 0.5718 0.1975 Year 5 0.4972 0.1317 Required: a) Calculate NPV and IRR for each machine (10 marks) b) Advise the firm if there is no capital rationing which project(s) to select. (5 marks) c) Explain to the Managing Director the two types of Capital Rationing and how Capital Rationing might affect the selection decision (10 marks) Total 25 Marksl