Ranking p r ojects Assume

Ranking p r ojects Assume

Assume that six projects, A–F in the table that follows, have been submitted for inclusion in the coming year’s budget for capital expenditures:

Project cash flows

Year A B C D E F

Investment	0	€(100 000)	€(100 000)	€(200 000)	€(200 000)	€(200 000)	€(50 000)
	1	0	20 000	70 000	0	5 000	23 000
	2	10 000	20 000	70 000	0	15 000	20 000
	3	20 000	20 000	70 000	0	30 000	10 000
	4	20 000	20 000	70 000	0	50 000	10 000
	5	20 000	20 000	70 000	0	50 000
Per year	6–9	20 000	20 000		200 000	50 000
	10	20 000	20 000			50 000
Per year	11–15	20 000
Internal rate
of return	Required	14%	?	?	?	12.6%	12.0%

1 Calculate the internal rates of return (to the nearest half per cent) for projects B, C and

D. Rank all projects in descending order in terms of the internal rate of return. Show your calculations.

2 Based on your answer in requirement 1, state which projects you would select, assuming a 10% required rate of return (a) if €500 000 is the limit to be spent, (b) if €550 000 is the limit, and (c) if €650 000 is the limit.

3 Assuming a 16% required rate of return and using the net present-value method, calcu- late the net present values and rank all the projects. Which project is more desirable, C or D? Compare your answer with your ranking in requirement 1.

4 What factors other than those considered in requirements 1 to 3 would influence your project rankings? Be specific.

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