Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

The management of Dawanu Ltd. is evaluating five investment projects whose expected cash flows are shown below:
Additional Information:

1. None of the five projects can be delayed or bought forward.
2. All the projects are divisible
3. The required rate of return on investments is 15%

Required:

i) Using the net present value (NPV) approach, determine which project(s) should be undertaken assuming capital will be available when required.
ii) Using the NPV approach, determine which project(s) should be undertaken assuming capital available on
1 January 2006 is limited to Sh.100 million
ANSWER

i) Project appraisal

Note: 1 January 2006 is taken as year 0

Conclusion – undertake all the projects if capital is unlimited as at 15% all are positive.

ii) If capital available at year 0 is limited to Ksh100 million it is necessary to undertake those projects with the highest NPV per unit of outlay at year 0.

In addition, the whole of project D would be undertaken, since this requires no year o outlay.

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