Question

6. The facilities manager was given the following table of potential projects from the planning department. The planning engineer has already calculated the net present value of income streams and the net present value of annual expenses for each project. Project A Project B Project C Project D Project E Initial Capital CostNet Present Value of Net Present value of Income stream Annual Expenses -100,000 150,000 25,000 - 150.000 200.000 -25.000 -125,000 135,000 -15,000 -250,000 150,000 50.000 400,000 -350,000 a) What is the net present value of each individual project? b) How many viable project bundles are there? (Note: use equation to calculate) c) Develop evaluation table capital cost vs NPV d) If the budget is $250,000, which project bundle should you choose and why?

Answer 1

a) NPV of a Project = Present Value f Income Streams - Present Value of Annual Expenses - Initial Capital Cost

Thereore, the NPV of each individual project will be :-

Project A = 150000-25000-100000 = $25,000

Project B = 200000-25000-1500000 = $25,000

Project C = 135000-15000-125000 = $ (5,000)

Project D = 150000-50000-250000 = $ (1.50.000)

Project E = 400000-350000-0 = $50,000

b) While evaluating a project, a project with positive NPV is said to be viable for Investment purposes.

Therefore, from the above part (a), we can conclude that the Project A, B and E are the viable project bundles.

c)

Evaluation Table: Capital Cost vs NPV

	Capital Cost	NPV	Decision
Project A	-1,00,000	+25,000	Recommended
Project B	-1,50,000	+25,000	Recommended
Project C	-1,25,000	-5,000	Not Recommended
Project D	-2,50,000	-1,50,000	Not Recommended
Project E	0	+50,000	Recommended

d) Since the viable project bundles are Project A, B and E and our budget is $2,50,000, we can invest in all the three bundles to ave maximum gain of $1,00,000 on aggregate basis.