Wonder Plc is considering two investment projects in another city and the estimated cash flows are as follows: Year Hotels £(m) Housing £ (m) 0 Capital outlay (200) (250) Net cash flows 1 130 130 2 60 120 3 80 120 4 100 80 4 Residual value 20 40 The company’s cost of capital is 15%. Required: a) Assess the viability of these two projects using NPV and Payback period as the appraisal techniques and advise Wonder Plc’s Board of Directors accordingly. b) Explain the importance of Payback period to the CEO.
Wonder Plc is considering two investment projects in another city and the estimated cash flows are as follows: Year Hotels £(m) Housing £ (m) 0 Capital outlay (200) (250) Net cash flows 1 130 130 2 60 120 3 80 120 4 100 80 4 Residual value 20 40 The company’s cost of capital is 15%. Required: a) Assess the viability of these two projects using NPV and Payback period as the appraisal techniques and advise Wonder Plc’s Board of Directors accordingly. b) Explain the importance of Payback period to the CEO.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 7PA: There are two projects under consideration by the Rainbow factory. Each of the projects will require...
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Question
Wonder Plc is considering two investment projects in another city and the estimated
|
Year |
Hotels £(m) |
Housing £ (m) |
| 0 Capital outlay | (200) | (250) |
|
Net cash flows |
||
| 1 | 130 | 130 |
| 2 | 60 | 120 |
| 3 | 80 | 120 |
| 4 | 100 | 80 |
|
4 Residual value |
20 | 40 |
The company’s cost of capital is 15%.
Required:
a) Assess the viability of these two projects using NPV and Payback period as the appraisal techniques and advise Wonder Plc’s Board of Directors accordingly.
b) Explain the importance of Payback period to the CEO.
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