The strategy committee of Profiti plc is analysing the forecasts for launching two alternative products (only one can be undertaken). Production of ‘Promo’ would be undertaken in Kosova (which operates in a remote area of high unemployment) and production of ‘Suogo’ would be undertaken in Albania near the Mother Theresa airport. The two managements have submitted the following forecasts.

	P		S
	$000		$000
Initial investment in fixed assets	560		540
Expected annual operating profits/(losses)
Year 1	100		100
Year 2	(250)		160
Year 3	750		300
Expected residual value of fixed assets at end
of year 3	50		90

In arriving at operating profits/(losses) the straight-line method is used for calculating depreciation of fixed assets. You may assume that the remaining elements of the operating profits are all received/paid in cash at the end of each year, as is the residual value when sold. The estimated cost of capital is 7% per annum. Taxation may be ignored.

REQUIRED:

1. Calculate for each project (showing all workings clearly)
   1. NPV

2. The payback period (give your answer using NPV in three years and assume the operating cash flows arise evenly throughout each year).

2. Assume the strategy committee now realises that the initial investment in P of $560,000 is not all for fixed assets but in the first year they have to train the new workforce, the cost of which is $100,000. (Assume all cash flows remain unchanged.)

3. After your calculation, which project would you recommend and why?

Answer rating: 100% (QA)

Umair No recnt ts Stirta ewohe classmate Date Page NPV fol Propect p Dianubing Determination Year Ca... View the full answer