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a) Explain what NPV method is and how it can be used to assess an investment decision. b) Evaluate the NPV for design A, B and C. Assume that the maintenance cost of the hostel for all the design is 10% from each yearly return. c) Based on the NPV evaluation in b), decide which is the best design to be used.

a) Explain what NPV method is and how it can be used to assess an investment decision. b) Evaluate the NPV for design A, B and C. Assume that the maintenance cost of the hostel for all the design is 10% from each yearly return. c) Based on the NPV evaluation in b), decide which is the best design to be used.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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You are currently working in a construction company. Your company have been appointed to a Build-Operate-Transfer project for UPM for the renovation of a student hostel. The contract involves an 80%-20% financing, in which your company will be financing 20% of the initial cost and will be allowed to collect the lease from the tenants for the first 7 years. You have received 3 different renovation designs for the hostel, each with different initial cost and projected yearly return from the concession as shown in Table 1 below. Table 1: Projected yearly return based on the design type (RM 'million) Design A (Initial cost RM5 mil) 290,000 290,000 300,000 290,000 310,000 320,000 330,000 Design B (Initial cost RM4.8 mil) 300,000 290,000 290,000 280,000 290,000 280,000 300,000 Design C (Initial cost RM5.5 mil) 300,000 310,000 310,000 300,000 290,000 300,000 290,000 Year 1 3 4 6 7 Your boss had requested you to select the best design that will give the best profit to the company. For this matter, you have decided to use Net Present Value (NPV) method to decide which is the best design to be used. a) Explain what NPV method is and how it can be used to assess an investment decision. b) Evaluate the NPV for design A, B and C. Assume that the maintenance cost of the hostel for all the design is 10% from each yearly return. c) Based on the NPV evaluation in b), decide which is the best design to be used.
Transcribed Image Text:You are currently working in a construction company. Your company have been appointed to a Build-Operate-Transfer project for UPM for the renovation of a student hostel. The contract involves an 80%-20% financing, in which your company will be financing 20% of the initial cost and will be allowed to collect the lease from the tenants for the first 7 years. You have received 3 different renovation designs for the hostel, each with different initial cost and projected yearly return from the concession as shown in Table 1 below. Table 1: Projected yearly return based on the design type (RM 'million) Design A (Initial cost RM5 mil) 290,000 290,000 300,000 290,000 310,000 320,000 330,000 Design B (Initial cost RM4.8 mil) 300,000 290,000 290,000 280,000 290,000 280,000 300,000 Design C (Initial cost RM5.5 mil) 300,000 310,000 310,000 300,000 290,000 300,000 290,000 Year 1 3 4 6 7 Your boss had requested you to select the best design that will give the best profit to the company. For this matter, you have decided to use Net Present Value (NPV) method to decide which is the best design to be used. a) Explain what NPV method is and how it can be used to assess an investment decision. b) Evaluate the NPV for design A, B and C. Assume that the maintenance cost of the hostel for all the design is 10% from each yearly return. c) Based on the NPV evaluation in b), decide which is the best design to be used.
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