Valuing Capital Investment Projects Case Solution
Growth Enterprise, Inc. (GEI)
Evaluation of the projects:
The Growth Enterprise, Inc. (GEI) has $40,000 dollars for investment. Therefore, the management of the company has four projects: A, B, C and D projects for the investment. Furthermore, the investment level of each project is $10,000 as well as tax rate, which is 40% of income before tax.On the other hand, each project has different revenue and operating expense therefore, when the management of the company analyzes these all projects then it will get different payback period, internal rate of return, accounting rate of investment as well as the net present value of each project will differ even though when the management of the company uses different discount rate, then each project’s net present value will be differ.Moreover,the following table gives the clear picture of each project by numerical values of the finical factors.
|
Projects |
A |
B |
C |
D |
|
payback |
3.5 |
2.64998 |
2.848485399 |
2.978825397 |
|
ROI |
80% |
70% |
13% |
36% |
|
NPV at 35% |
12194.787 |
-6299.594777 |
-588172% |
-8621.580586 |
|
NPV at 35% |
12194.787 |
-6299.594777 |
-588172% |
-8621.580586 |
|
NPV at 10% |
13636.364 |
-5427.902329 |
-3007.265214 |
-8303.517155 |
It is clear that each project has different value with different technique as each project is being evaluated by different assumption. As project A is one-year project for the investment where project B is two-year investment project, then in this way project C and project D both are three years’ investment project.Due to the different time period of investment, each project’s value is differing as well as their investment return and internal rate of return differ and it is expected that, if a company invests in two different time periods then the company has more risk as well as high return as compared to the risk and returns of the long period of time.
Mutually Exclusive& Independent Projects
If the projects are mutually exclusive, then the management of the company should select project A for investment as project A has more profitable project for investment in terms of accounting rate of investment, internal rate of return.Moreover, project A is profitable according to financial analysis in terms of the net present value at different discounted rate of returns.
On the other hand, if all projects are independent from each other,then the management of the company should select project B as by investing in project B the management of the company will be able to recover its investment amount in 2.6 years from the company’s net income where the other project takes more time to recover the investment amount.
Moreover, if the management of the company wants to invest a project that has less level of the risk but its gives good returns, then the management of the company will select the project B as it has low level of the risk as compared to the other project due to the long period of time for investment as well as this project return on investment is more than the market discount rate.
Furthermore, if the management of the company evaluates the project on the basis of net present value and discount rate, then as a result project A will be best for invests as compared to the other three projects due to having highest net present value at different discounted rate......................
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