The three options' expected net present value (NPV) and profitability indexes (PI) has been calculated 1. Discuss which option(s) should be chosen for investment, assuming the company can invest surplus cash in the money market at 10% (Note: You should assume that the R50m expenditure limit is the absolute maximum the company wishes to spend). 2. Discuss whether the company's decision not to borrow, thereby limiting investment expenditure, is in the best interests of its shareholders.
The three options' expected net present value (NPV) and profitability indexes (PI) has been calculated 1. Discuss which option(s) should be chosen for investment, assuming the company can invest surplus cash in the money market at 10% (Note: You should assume that the R50m expenditure limit is the absolute maximum the company wishes to spend). 2. Discuss whether the company's decision not to borrow, thereby limiting investment expenditure, is in the best interests of its shareholders.
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
Related questions
Question
The three options' expected net present value (NPV) and profitability indexes (PI) has been calculated
1. Discuss which option(s) should be chosen for investment, assuming the company can invest surplus cash in the money market at 10% (Note: You should assume that the R50m expenditure limit is the absolute maximum the company wishes to spend).
2. Discuss whether the company's decision not to borrow, thereby limiting investment expenditure, is in the best interests of its shareholders.
Transcribed Image Text:Three possible capital allocation opportunities for manufacturing have been identified. Only
R50 million is available in cash, and the directors intend to limit their capital expenditure over
the next 12 months to this amount. The three options are not divisible (i.e., cannot be scaled
down), and none of them can be postponed.
Expected nominal net cash flows (including residual values) are:
A
B
(R35 000 000) (R10 500 000)
R11 000 000
R15 000 000
R6 000 000
R6 000 000
R25 000 000
R6 000 000
Initial Investment
Year 1
Year 2
Year 3
C
(R3 500 000)
(R3 500 000)
(R1 500 000)
R13 000 000
The company's shareholders currently require a 15% (nominal) return on their investment for
any project of similar risk to the current operations.
Transcribed Image Text:Investment TO
T1
T2
T3
NPV
IRR
PV
PI
Investment TO
T1
T2
T3
NPV
IRR
PV
PI
15%
15%
A
-R35 000 000
R11 000 000
R15 000 000
R25 000 000
A
B
R2 345 278.21
R3 199 350.70
18%
33%
R37 345 278.21 R13 699 350.70
-1.07
-1.30
-R35 000 000
R11 000 000
R15 000 000
R25 000 000
-R10 500 000
R6 000 000
R6 000 000
R6 000 000
B
-R10 500 000
R6 000 000
R6 000 000
R6 000 000
R2 345 278.21
R3 199 350.70
18%
33%
R37 345 278.21 R13 699 350.70
-1.07
-1.30
с
C
-R3 500 000
-R3 500 000
-R1 500 000
R13 000 000
R870 017.26
20%
R4 370 017.26
-1.25
-R3 500 000
-R3 500 000
-R1 500 000
R13 000 000
R870 017.26
20%
R4 370 017.26
-1.25
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education