Provide an evaluation of two proposed Investments which are expected to provide cash flow forecasts as follows: Mining Vineyard Investment Investment Initial cost $1,000,000 $1,200,000 Expected life 5 years 6 years Scrap value expected $120,000 $25,000 Expected cash inflows: $ $ 1 300,000 200,000 2 400,000 300,000 3 100,000 400,000 4 500,000 250,000 5 70,000 200,000 6 180 000 The AddVenture Company requires a rate of return on both investments equal to 10 percent. The company relies on a number of criteria when evaluating new investment opportunities. Assuming that you are Peter Bright, evaluate both investments by providing a clear understanding of the investments’ feasibility by responding to the above memo based on the following: The payback period The Net Present value (NPV) The Profitability Index (PI)
The AddVenture Company owns a piece of land that can be used in different ways. On one hand, this land has minerals beneath it that could be mined, so AddVenture could invest in the mining equipments and reap the benefits of retrieving and selling the minerals. On the other hand, the land has perfect soil conditions for growing grapes that could be used for making wine, so the company could use it to support a vineyard.
Clearly, these two uses are mutually exclusive as the mine cannot be dug if there is a vineyard and the vineyard cannot be planted it the mine is dug. That is the acceptance of one investment will automatically excludes the acceptance of the other.
Peter Bright has been working at the AddVenture Company one year as a clerk in the Finance department since he graduated from the Oxford College with a degree in Business Administration. Peter over heard the Chief Financial Officer requesting that an advertisement be done to invite applications for an analyst to evaluate the prospects of the two investments. Peter has managed to convinced the CFO that he did
TO: Peter Bright
FROM: Frank DeMarzo, CFO, AddVenture Company.
RE: Capital Investment Appraisal.
Provide an evaluation of two proposed Investments which are expected to provide cash flow
Mining Vineyard
Investment Investment
Initial cost $1,000,000 $1,200,000
Expected life 5 years 6 years
Scrap value expected $120,000 $25,000
Expected
1 300,000 200,000
2 400,000 300,000
3 100,000 400,000
4 500,000 250,000
5 70,000 200,000
6 180 000
The AddVenture Company requires a rate of
Assuming that you are Peter Bright, evaluate both investments by providing a clear understanding of the investments’ feasibility by responding to the above memo based on the following:
- The payback period
- The
Net Present value (NPV) - The Profitability Index (PI)
- The
Internal Rate of Return (IRR) - Which project should be accepted and why. (Using all four decision criteria listed above.)
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