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334 350 Project number: Initial Investment $(2,000) Year 1 $ 330 2 330 3 330 4 330 5 330 6 330 7 330" 8 $1,000 9 10 11 12 13 14 15 Sum of cash flow benefits $3,310 Excess of cash flow over initial investment $1,310 2 3 5 6 7 8 $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $(2,000) $1,666 $ 160 $ 280 $ 2,200 $1,200 $ (350) 200 280 900* (60) 165 280 300 60 395 280 90 350 432 280 70 700 440" 280 1,200 442 280 $ 2,250" 444 280* 446 280 448 280 450 280 451 280 451 280 280 $10,000* $(2,000) $ 280 452 $2,165 $10,000 $ 3,561 $4,200 $2,200 $2,560 $ 4,150 $ 165 $ 8,000 $ 1,561 $2,200 $ 200 $ 560 $ 2,150 ID - CAPEX Marking Scheme: ID is a multi-divisional conglomerate. It uses 10% discount rate (K) to evaluate its holdings. After reviewing Exhibit 1 of preliminary project evaluation, the President has narrowed down to the two best performing projects: Project 7 with $165 NPV and Project 8 with $183 NPV and request the Finance Manager (you) to provide some comparative analysis. a). How sensitive of Projects 7 and 8 to discount rate changes e.g., how much "K" increase (e.g., if K=11% NPV = 0 then it is 10% increase) would make the project NPV = 0.) b). How much annual inflow decrease (in % term e.g., drop by 5%) will make Projects 7 and 8 NPV = 0 c). AT what discount rate (K) to make Project 7 NPV = $ 183 d). How much K to increase to make Project 8 NPV = 165 e). The Project Manager of Project 7 argues his Project has much shorter Payback period so it should be preferred. As Project Manager of Project 8 provides valid "qualitative" factor on why his Project should be favored

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