Please assist me with this question Question 6 Goga is evalu

Please assist me with this question

Question 6 Goga is evaluating three projects to maximize its shareholder\'s value. The three projects A, B, and C are equally risky. The company\'s required cost of capital for evaluating each of the projects is 11 percent. The initial outlay and annual cash flows over the life of each project are shown in the table below. 20 Marks Project A Project B Project C Initial Outlay (CFO) Year (t) (50,00000) 35,000.00 60,000.00 Cash Inflows (CFt) 8,000.00 8,000.00 8,000.00 8.000.00 8,000.00 8,000.00 18,000.00 18,000.00 18,000.00 18,000.00 18,000.00 2 12,000.00 15,000.00 22,000.00 5 6 Required 6.1. Calculate the NPV for each project over its life. Rank the projects in descending order 6.2. Use equivalent annuity (EAC) approach to evaluate and rank the projects in 6.3. Use replacement chain method to evaluate and rank the projects in descending order 6.4. Compare and contrast your findings in parts (6.1), (6.2)and (6.3). Which project would based on NPV descending order based on the EAC. you recommend that the company implement? Why?

Solution

6.1)NPV for project A:

= -50000 + (8000 / 1.11) + (8000 / 1.11 ^2) + (8000 /1.11^3) + (8000 / 1.11^4) + (8000 / 1.11^5) + (8000 / 1.11^ 6)

NPV = -16155.69

NPV for project B

= -35000 + ( 6000 / 1.11) + ( 12000 / 1.11^2) + ( 15000 / 1.11^3) +( 22000 / 1.11^4)

NPV= 5604.83

NPV for project C

= -60000 + (18000 / 1.11) +( 18000 / 1.11^2) + ( 18000 / 1.11^3) + ( 18000 / 1.11^4) + ( 18000 / 1.11^5)

NPV= 6526.15

NPV of project C is highest followed by NPV of B & NPV of project A is negative.

NPV of projects in descending order is C, B ,A.

6.2) By equivalent annuity approach (EAC)

From Project A NPV= -16155.69

Therefore EAC: PV= -16156, N=6( Six years), Cost of capital= 11%,

PMT (Payment EAC)= -3818.9

From Project B NPV= 5605

Therefore EAC: PV= 5605, N=4( four years), Cost of capital= 11%,

PMT (Payment EAC)= -1806.64

From Project C NPV= 6526

Therefore EAC: PV= 6526, N=5( five years), Cost of capital= 11%,

PMT (Payment EAC)= -1765.74

Therefore Project C has highest EAC followed by Project B and the last being Project A.

We can evaluate by the two methods that Project C is the most profitable and hencee should be given top priority followed by Project B and tthen by Project A.

If the three projects are mutually exclusive project C should be accepted as it has the hiighest NPV.

If the three projeects are independent Project C and Project B should be accepted as both have positive NPV and Project A should be rejected as it has negativee NPV