Initial Project NPV IRR Investment A 4,600,000 930,000 22% B 1,800,000 720,000 18% C 3,300,000 610,000 20% D 4,100,000 1,380,000 16% E 2,700,000 640,000 8%
Tuas Limited (“Tuas”) is considering to replace its existing air-conditioning system with an energy efficient centralised cooling system that is compliant with BCA Green Mark 2021 (“new cooling system”).
Civil engineering costs to assess the feasibility of the new cooling system of $50,000 was incurred last month. Installing the new cooling system will cost $320,000, and maintenance expense of $25,000 per year is required. An initial investment in spare parts inventory of $12,000 is needed, which will be fully recovered at the end of its useful life of five years.
Savings in utilities is estimated to be $150,000 per year for the next five years. Tuas adopts a policy of
Tuas is also considering the following five projects, and has $8M available to invest:
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Examine which projects Tuas should invest in and explain why.
Discuss how Project A with a much higher IRR of 22% compared to Project D’s 16% can have a much lower NPV than Project D.
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