Ruba Nasser SAOG is planning to invest in project as part of the organization's growth strategy to enhance the financial sustainability of the organization. The organization has two options available. Option 1– Project A – Increase the capacity in Division A Option 2 – Project B – Increase the capacity in Division B. Both projects are mutually exclusive. The available capital investrment for the Project is RO 250,000. Due to the limited funds the organization needs to decide on a suitable investment project which will be part of the sustainable growth strategy. Below are the details for both Projects; Project A – Increase in machine capacity in Division A Cost of Investment – RO 250,000 Useful Life – 4 Years Year 1 Operating Profit Before Depreciation (RO) 55,000 65,000 80,000 80,000 3 4 The project has a scrap value of OMR 75,000. Project B - Increase in Machine Capacity in Division B Cost of Investment – RO 250,000 Useful life – 4 Years Year 1 Operating Profit Before Depreciation (RO) 75,000 75,000 78,000 82.000 3 4 The project has a scrap value of OMR 70,000. Company's Policy The company's Standard payback period is 4.5 years and a standard ARR of 25%. The organization evaluates their projects at a cost of capital (discount rate) 10%. Year PV Factor |@ 10% a. Assuming you are the Finance Manager of the organization you are require to calculate the following for each project; į Payback Period ii. Average Rate of Return iii. Net Present Value 1 0.909 2 0.826 3 0.751 4 0.683 iv. Internal Rate of Return b. Recommend the most suitable project for the organization with suitable justification?
Ruba Nasser SAOG is planning to invest in project as part of the organization's growth strategy to enhance the financial sustainability of the organization. The organization has two options available. Option 1– Project A – Increase the capacity in Division A Option 2 – Project B – Increase the capacity in Division B. Both projects are mutually exclusive. The available capital investrment for the Project is RO 250,000. Due to the limited funds the organization needs to decide on a suitable investment project which will be part of the sustainable growth strategy. Below are the details for both Projects; Project A – Increase in machine capacity in Division A Cost of Investment – RO 250,000 Useful Life – 4 Years Year 1 Operating Profit Before Depreciation (RO) 55,000 65,000 80,000 80,000 3 4 The project has a scrap value of OMR 75,000. Project B - Increase in Machine Capacity in Division B Cost of Investment – RO 250,000 Useful life – 4 Years Year 1 Operating Profit Before Depreciation (RO) 75,000 75,000 78,000 82.000 3 4 The project has a scrap value of OMR 70,000. Company's Policy The company's Standard payback period is 4.5 years and a standard ARR of 25%. The organization evaluates their projects at a cost of capital (discount rate) 10%. Year PV Factor |@ 10% a. Assuming you are the Finance Manager of the organization you are require to calculate the following for each project; į Payback Period ii. Average Rate of Return iii. Net Present Value 1 0.909 2 0.826 3 0.751 4 0.683 iv. Internal Rate of Return b. Recommend the most suitable project for the organization with suitable justification?
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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Transcribed Image Text:Ruba Nasser SAOG is planning to invest in project as part of the organization's growth strategy to
enhance the financial sustainability of the organization. The organization has two options available.
Option 1– Project A – Increase the capacity in Division A
Option 2 – Project B – Increase the capacity in Division B.
Both projects are mutually exclusive. The available capital investment for the Project is RO 250,000.
Due to the limited funds the organization needs to decide on a suitable investment project which will
be part of the sustainable growth strategy.
Below are the details for both Projects
Project A - Increase in machine capacity in Division A
Cost of Investment – RO 250,000
Useful Life – 4 Years Year
Operating Profit Before Depreciation (RO)
55,000
65,000
80,000
80,000
1
2
3
4
The project has a scrap value of OMR 75,000.
Project B – Increase in Machine Capacity in Division B
Cost of Investment – RO 250,000
Operating Profit Before Depreciation (RO)
75,000
75,000
78,000
82.000
Useful life – 4 Years Year
1
3
The project has a scrap value of OMR 70,000.
Company's Policy
The company's Standard payback period is 4.5 years and a standard ARR of 25%. The organization
evaluates their projects at a cost of capital (discount rate) 10%.
Year
PV Factor
@ 10%
a. Assuming you are the Finance Manager of the organization you are require to calculate the
following for each project;
į Payback Period
ii. Average Rate of Return
iii. Net Present Value
iv. Internal Rate of Return
2
1
0.909
3
0.751
4
0.683
0.826
b. Recommend the most suitable project for the organization with suitable justification?
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