QUESTIONS:

1. The Khairat corporation is faced with two mutually exclusive investment proposas.
One would cost N100,000 and would provide net cash benefits of N30,000 per year
for five years. Te other would cost N50,000 and provide net cost benefit of N16,000
of five years. Khairat has a 10 percent after tax opportunity cost of funds. Compare
the net present value and profitability index of each project. Which project should be
accepted?
2. The Zeenat company is considering two mutually exclusive projects. Both require an
initial cash outlay of 10,000each and a life of five years. The company’s required rate
of return is 10% and pays tax at 50% rate. The projects will be depreciated on a
straight line basis. The net cash flows (before taxes) expected to be generated by he
projects are as follows:
YEAR 1 2 3 4
5
PROJECTED N4000 N4000 N4000 N4000 N4000
PROJECT 2 6000 3000 2000 5000 5000
CALCULATE:
THE PAYBACK PERIOD FOR EACH PROJECT
THE ARR FOR EACH PROJECT
THE NPV OF EACH PROJECT
WHICH PROJECT SHOULD BE ACCEPTED AND WHY?
3. The MIFO company has a capital budget of N1,000,000 and the following
acceptable projects:
BENEFIT
PROJECTS NET INVESTMENT COST RATIO PV
A N300,000 1.28 3,840,000
B 200,000. 1.05 210,000
C 100,000 1.25 125,000
D 900,000 1.10 990,000
E 500,000 1.14 570,000
F 100,000 1.50 150,000
G 800,000 1.20 960,000
(i) calculate the present value inflows associated with each project
(ii) select the optimal group of projects to implement, keeping in mind that unused
funds are costly
4 The Idu and Ezu steel company is in the process of evaluating two mutually exclusive
projects for increasing their plant capacity. Management have developed pessimistic, most
likely and optimistic estimates of the annual cash flows associated with each project. These
projects are as follows:
PROJECT A PROJECT B
NET INVESTMENT N5500 5500
PESSIMISTIC 200 700
MOST LIKELY 800 800
OPTMISTIC 1400 900
(i) CACULATE THE NET PRESENT VALUE (NPV) ASSOCIATED WITH EACH ESTIMATE GIVEN
FOR BOTH PROJECTS. THE PROJECTS BOTH HAVE 16 YEARS LIVES AND THE
FIRM’S COST AO CAPITAL IS 9%
(ii) CALCULATE THE EXPECTED NET PRESENT VALUE ASSOCIATED WITH PROJECTS A AND
B, IF THE PROBABILITIES ASSOCIATED WITH THE PESSIMISTIC, MOST LIKELY AND
OPTIMISTIC ESTIMATES ARE 20%, 50% AND 30% RESPECTIVELY
(iii) IN THE LIGHT OF YOUR FINDINGS IN (i) AND (ii) DISCUSS THE RISK RETURN TRADE
OFF ASSOCIATED WITH EACH PROJECTS. DO YOU HAVE A PREFERENCE FOR ANY
OF THE TWO PROJECTS ? WHY? OR WHY NOT?