Question

Martock Corp. is considering one of the following four mutually exclusive projects(WACC of 10.7%):

Project Aphrodite: Requires an initial investment of $15 mln, payable today. Annual cash inflows from the project will be $2.25 mln for 20 years.

Project Apollo: Requires an initial investment of $17 mln payable today. Cash inflows in Year 1 will be 3 mln. Cash inflows will then grow by 7% per year until the project ends in Year 9.

Project Demeter: Requires an initial investment of $13.5 mln, payable in Year 5 (when the project is to start). The project will then generate annual cash inflows in Years 6 through 9 of $2.85 mln, $3.15 mln, $9.85 mln, and $5.75 mln, respectively.

Project Zeus: Requires an initial investment of $10 mln, payable today. The project will then generate cash inflows of $5 mln in Year 5, $10 mln in Year 10, and $20 in Year 13.   

Which of the projects should MC undertake? Justify your answer.

Answer 1

		Aphrodite			Apollo			Demeter			Zeus
Year	PV factor @ 10.7%	cashflow	PV		cashflow	PV		cashflow	PV		cashflow	PV
0	1.0000	$ (15.00)	$ (15.00)		$ (17.00)	$ (17.00)			$         -		$ (10.00)	$ (10.00)
1	0.9033	$     2.25	$     2.03		$     3.00	$     2.71			$         -			$         -
2	0.8160	$     2.25	$     1.84		$     3.21	$     2.62			$         -			$         -
3	0.7372	$     2.25	$     1.66		$     3.43	$     2.53			$         -			$         -
4	0.6659	$     2.25	$     1.50		$     3.68	$     2.45			$         -			$         -
5	0.6015	$     2.25	$     1.35		$     3.93	$     2.37		$ (13.50)	$   (8.12)		$     5.00	$     3.01
6	0.5434	$     2.25	$     1.22		$     4.21	$     2.29		$     2.85	$     1.55			$         -
7	0.4909	$     2.25	$     1.10		$     4.50	$     2.21		$     3.15	$     1.55			$         -
8	0.4434	$     2.25	$     1.00		$     4.82	$     2.14		$     9.85	$     4.37			$         -
9	0.4006	$     2.25	$     0.90		$     5.15	$     2.06		$     5.75	$     2.30			$         -
10	0.3618	$     2.25	$     0.81			$         -			$         -		$   10.00	$     3.62
11	0.3269	$     2.25	$     0.74			$         -			$         -			$         -
12	0.2953	$     2.25	$     0.66			$         -			$         -			$         -
13	0.2667	$     2.25	$     0.60			$         -			$         -		$   20.00	$     5.33
14	0.2410	$     2.25	$     0.54			$         -			$         -			$         -
15	0.2177	$     2.25	$     0.49			$         -			$         -			$         -
16	0.1966	$     2.25	$     0.44			$         -			$         -			$         -
17	0.1776	$     2.25	$     0.40			$         -			$         -			$         -
18	0.1605	$     2.25	$     0.36			$         -			$         -			$         -
19	0.1449	$     2.25	$     0.33			$         -			$         -			$         -
20	0.1309	$     2.25	$     0.29			$         -			$         -			$         -
NPV=total of PV			$     3.27			$     4.37			$     1.65			$     1.96
NPV			$     3.27			$     4.37			$     1.65			$     1.96
Outflow			$   15.00			$   17.00			$     8.12			$   10.00
Profitability index= NPV/Outflow			0.22			0.26			0.20			0.20
As we can see, Project apollo is having highest NPV and highest PI and hence the same should be selected.