Reference no: EM133234179
Aman Limited is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects typically have a short life as it introduces new models periodically.
You have recently joined Aman Limited as a financial analyst reporting to Ravi Sharma, the CFO of the company. He has provided you the following information about three projects, A, B, and C that are beingconsidered by the Executive Committee of Aman Limited:
Project A is an extension of an existingline. Its cash flow will decrease over time.
Project B involves a new product. Building its market will take some time and hence its cash flow will increaseover time.
Project C is concerned with sponsoring a pavilion at a TradeFair. It will entail a cost initiallywhich will be followed by a huge benefit for one year. However, in the year following that some cost will be incurred to raze the pavilion.
The expectednet cash flowsof the three projects are as follows.
Year Project A (Rs.) Project B (Rs.) Project C (Rs.)
0 (15000) (15000) (15000)
1 11000 3500 42000
2 7000 8000 (4000)
3 4800 13000 -
Ravi Sharma believesthat all the three projectshave risk characteristics similar to the average risk of the firm and hence the firm's cost of capital,viz. 12 percent,will apply to them.
You have been asked to prepare a report for the executive committee, covering the following:
What is the paybackperiod and discounted payback period? Find the payback period and the discounted payback period of Projects A and B.
What is net presentvalue (NPV)? What are the properties of NPV? Calculatethe NPV of projects A, B, and C
What is the internalrate of return (IRR)? What are the problems with IKK? Calculatethe IRR for Projects A, B, and C
What is the modified internal rate of return (MIRR)? What are the pros and cons of MIRR vis-à-vis IRR and NPV? Calculate the MIRR for Projects A, B, and C assuming that the intermediate cash flows can be reinvested at 12 percentrate of return.