Question: Question 1 Dignity Ltds directors are evaluating 2 investment projects which are mutually exclusive. These 2 projects are related to new plant acquisition. Below are
Question 1
Dignity Ltds directors are evaluating 2 investment projects which are mutually exclusive. These 2 projects are related to new plant acquisition. Below are the data which are available for each project :
|
| Project | |
|
| A () | B () |
| Investment Cost | 101,000 | 61,000 |
| Net profit (loss) per year expected |
|
|
| 1st Year | 30,000 | 19,000 |
| 2nd Year | (2,000) | (3,000) |
| 3rd Year | 3,000 | 5,000 |
| Scrap Value (Estimated) | 8,000 | 7,000 |
The required rate of return for the firms investment projects is 20%. The straight-line depreciation method is utilised for the firms fixed assets when net profits are calculated. The working capital will not be increased for both firms. There are no cash flow problems for both firms to meet their investment requirements.
Required:
- Evaluate which of the 2 projects the firm should undertake and critically explain why. (5 marks)
- The board of directors of Dignity Ltd are thinking of how to finance its future investment projects. Critically discuss how the company can raise medium to long-term finance for this purpose. (8 marks)
- Maxwell Company Public Limited Corporation is a public-listed firm which produce various types of tea and coffee for consumers. It has been operating for just 2 years and investors have found that the company do not undertake all relevant profitable investment projects which are available to the firm. Critically discuss what type of problems that the firm may be encountering and why.
(12 marks)
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