Oil Gas Limited is considering investing in two projects; Project 1 and Project 2. Information relating to both is provided below: Details Project 1 Project 2 $ $ Initial Cost 150 000 150 000 Cash Flow: Year 1 60 000 54 000 Year 2 50 000 44 000 Year 3 45 000 39 000 Year 4 125 000 49 000 Year 5 0 104 000 Project 1 will be sold for a scrap value of $30 000 at the end of year 4 and Project 2 for a scrap value of $24 000 at the end of year 5. Oil Gas Limited’s capital structure is made up of 50% debt and 50% ordinary shares. The cost of debt is 10% and cost of equity
Oil Gas Limited is considering investing in two projects; Project 1 and Project 2. Information
relating to both is provided below:
Details Project 1 Project 2
$ $
Initial Cost 150 000 150 000
Cash Flow: Year 1 60 000 54 000
Year 2 50 000 44 000
Year 3 45 000 39 000
Year 4 125 000 49 000
Year 5 0 104 000
Project 1 will be sold for a scrap value of $30 000 at the end of year 4 and Project 2 for a scrap
value of $24 000 at the end of year 5.
Oil Gas Limited’s capital structure is made up of 50% debt and 50% ordinary shares. The cost of
debt is 10% and
A. Calculate the
should be chosen.
B. Describe FOUR (4) problems associated with discounted cash flow methods of analysis.
C. Elaborate on ONE (1) option valuation capital budgeting technique that could be used
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