Blog: Fin622 GDB No. 1 solution

Solution:

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After discounting all cash flows of projects with its opportunity coats, the net present
values of all three projects are (NPV)
Project A_NPV: +1432
Project B_NPV: -12200
Project C_NPV: +21485

1: On the basis of NPV approach, which project(s) you would select if the projects are independent and why?
ANS _1 :If the projects are independent so the projects that have +NPV should be accepted in the given scenario project A and C have positive NPV

2: On the basis of NPV approach, which project(s) you would select if the projects are mutually exclusive and why
Mutually exclusives are those projects where we have to choose only one out of different options.
If the projects are mutually exclusive the one with higher positive net present value (+NPV) should be chosen

Ans_2: So in given scenario the best project is C with the higher positive npv 21485 among three projects so rationally chose project C

Reference: Financial Management Theory and Practice 8th edition _BRIGHAM AND GAPENCSKI
Chapter #9 page #398

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XYZ Company is one of the biggest manufacturing concerns of the country. Being the finance manager of XYZ Company, you have been assigned a task to evaluate three projects. The future cash flows from the three projects are summarized in given table.



Project A
Project B
Project C

Initial investment
45,000
70,000
50,000


Cash inflows

Year 1
20,000
20,000
30,000

Year 2
20,000
26,000
28,000

Year 3
20,000
30,000
35,000

Consider the discount factor to be 14% and that the company has sufficient funds to take projects.

Required:

I. On the basis of NPV approach, which project(s) you would select if the projects are independent and why?

II. On the basis of NPV approach, which project(s) you would select if the projects are mutually exclusive and why?