Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

XYZ company Limited is considering a major investment in a new productive process. The total cost of the investment has been estimated at Sh.2,000,000 but if this were increased to Sh.3,000,000, productive capacity would be substantially increased. Because of the nature of the process, once the basic plant has been established, to increase capacity at some future date is exceptionally costly. One of the problem facing management is that the demand for process output is very uncertain. However, the market research and finance departments have been able to produce the following estimate:

Required:
Compute the expected NPV of each of the project and state the one to be chosen.
ANSWER

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