Question 1 Downtown Plc is in the process of evaluating two alternative projects, which are mutually exclusion. The projects will both required two different manufacturing machines and, both machines will have no residual values at the end of the project. Due to certain restrictions, only one of the two projects can be implemented. The following estimated cash flows over the life of the two projects are provided below: Cash Flows Year Project A Project B £(millions) £’(millions) 0 -600 -650 1 250 200 2 250 200 3 250 300 4 100 250 The company’s cost of capital is 10%. Calculate the net present value (NPV) of both projects and recommend with reasons which project should be implemented by
Question 1
Downtown Plc is in the process of evaluating two alternative projects, which are mutually exclusion. The projects will both required two different manufacturing machines and, both machines will have no residual values at the end of the project. Due to certain restrictions, only one of the two projects can be implemented. The following estimated cash flows over the life of the two projects are provided below:
Cash Flows
|
Year |
Project A |
Project B |
|
|
£(millions) |
£’(millions) |
|
0 |
-600 |
-650 |
|
1 |
250 |
200 |
|
2 |
250 |
200 |
|
3 |
250 |
300 |
|
4 |
100 |
250 |
The company’s cost of capital is 10%.
Calculate the
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