bamboo plc is considering the selection of one of a pair of mutually exclusive investment projects. both projects would require the purchase of machinery with a life of five years.
project 1 would generate annual cash flow ( receipts less K200,000) the machinery would cost K556,000 and have the scrap value of K56,000.
project 2 would generate annual cash flow of K500,000. the machine would cost K1,616,000 and have a scrap value of K301,000. both projects would required a working capital investment of K10,000 throughout their operational lives. bamboo plc uses the straight line method of depreciation, its cost of capital is 15%per annum.
required :
a) outline non financial objectives which may arise as a result of bamboo plc undertaking one of the projects
b) calculate for each project using the information in the case study above:
i) NPV
ii) IRR
c) which of the project should be selected under each method, justify your answer with reasons
a) increase market share, improve the quality of the products, drive innovation, decrease environment negative impact, increase labour efficiency,
b) Assumptions - project A 200,000 is net cashflow after deducting the 10,000 maintenance cost (not clear from the question)
(you will need to ararnge the figures, there is no way to arrange here)
Cost of capital 0.15
Proj 1 Year Year Year Year Year Year
0 1 2 3 4 5
Investment -556,000.0
Cash-Flows 200,000 200,000 200,000 200,000 200,000
Scrap 56.000
Total CF -556,000.0 200,000 200,000 200,000 200,000 256,000
DF 1.00 0.87 0.76 0.66 0.57 0.50
PVs -556,000 173,913 151,228 131,503 114,350 127,277
NPV 142,272.9
IRR 25.01%
Proj 2 Year Year Year Year Year Year
0 1 2 3 4 5
Investment -1,616,000.0
Cash-Flows 500,000.0 500,000.0 500,000.0 500,000.0 500,000.0
Maintenance -10,000.0 -10,000.0 -10,000.0 -10,000.0 -10,000.0
Scrap 301,000.0
Total CF -1,616,000.0 490,000.0 490,000.0 490,000.0 490,000.0 791,000.0
DF 1.00 0.87 0.76 0.66 0.57 0.50
PVs -1,616,000.0 426,087.0 370,510.4 322,183.0 280,159.1 393,266.8
NPV 176,206.2
IRR 19.21%
c) Both projects have positive NPV and in both cases IRR is higher than the cost of capital so both could be undertaken. However, Project 1 has a significantly better IRR and also requires less capital investment. So, I would recommend project 1 and would seek better investment oportunities for the remaining cash