Reference no: EM132572139
You are the Finance Manager of Off-the-Beat Manufacturing Limited. The company has to evaluate two mutually exclusive projects, A and B, to enable its management decide on which project to undertake. Two years ago, the company acquired a piece of land at the cost of GH¢150,000 and has so far paid a total of GH¢120,000. The GH¢30,000 unpaid balance was agreed and scheduled to be paid in two years' time. The land was acquired in anticipation of carrying out either project A or B. It has already incurred GH¢45,000 on Project A and GH¢50,000 on Project B for research and feasibility studies.
Project A would require an immediate outlay of GH¢550,000 on plant and machinery whilst GH¢480,000 would be required in the case of Project B for the same purpose. Both plants would have useful lives of six years with the following expected cash flows:
Year Project A (GH¢) Project B (GH¢)
1 230,000 95,000
2 205,000 125,000
3 175,000 140,000
4 110,000 155,000
5 90,000 180,000
6 60,000 217,000
At the end of the sixth year the plant and machinery under both projects would have salvage values equivalent to 10% of their initial costs. Net working capital requirements would amount to GH¢60,000 and GH¢50,000 for Projects A and B respectively. In each case, the investment in net working capital will be made immediately and will be recovered in full at the end of the projects' lives in six years' time. The company's required return is 17%
Question 1: As the Finance Manager, you are required to evaluate the two projects and advise the company's management on which of them to undertake if you apply:
i) the Net Present Value appraisal technique
ii) the Internal Rate of Return appraisal technique (for your trial and error calculations, use discount rates of 17% and 19% in both projects).
iii) the Payback Period appraisal technique