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The management of Faulu Limited is contemplating to invest in 8 projects. The capital expenditure during...

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Finance

  1. The management of Faulu Limited is contemplating to invest in 8projects. The capital expenditure during the year has been rationedto sh.500,000 and the projects have equal risk and should bediscounted at the firm’s cost of capital of 10%

Project

Cost (sh.)

Project life (years)

Cash flow per year (sh.)

A

B

C

D

E

F

G

H

400,000

50,000

100,000

75,000

75,000

50,000

250,000

250,000

20

10

8

15

6

5

10

3

58600

55000

24000

12000

18000

14000

41000

99000

Required:

Determine the optimal investmentsets.                    

Answer & Explanation Solved by verified expert
3.6 Ratings (575 Votes)

Calculation of NPV
Particulars A B C D E F G H YEAR DISCOUNT FACTOR
Cash Flow 58600 55000 24000 12000 18000 14000 41000 99000 1 0.909090909
2 0.826446281
PVIFA(10%,20) 8.51 3 0.751314801
PVIFA(10%,10) 6.144567 4 0.683013455
PVIFA(10%,8) 5.334926 5 0.620921323
PVIFA(10%,15) 7.60608 6 0.56447393
PVIFA(10%,6) 4.355261 7 0.513158118
PVIFA(10%,5) 3.790787 8 0.46650738
PVIFA(10%,10) 6.144567 9 0.424097618
PVIFA(10%,3) 2.486852 10 0.385543289
11 0.350493899
12 0.318630818
PV 498894.8 337951.2 128038.2 91272.95 78394.69 53071.01 251927.3 246198.3 13 0.28966438
14 0.263331254
COST 400000 50000 100000 75000 75000 50000 250000 250000 15 0.239392049
16 0.217629136
NPV 98894.83 287951.2 28038.23 16272.95 3394.693 3071.015 1927.251 -3801.65 17 0.197844669
18 0.17985879
19 0.163507991
20 0.148643628
Conclusion
As Highest NPV is in Project A, 400000 shall be invested in Project A
Second highest NPV is in Project B, 50000 shall be invested in Project B
Third highest NPV is in project C, 50000 shall be invested in project C.

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