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.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 7P: Your division is considering two investment projects, each of which requires an up-front expenditure...
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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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