onesia is one of the most prestigious companies providing holiday travel packages to tourism destinations in Indonesia. The company's management is undergoing expansion strategy to cater higher demand in 2023 onward. As part of the strategy, the company is evaluating two independent projects that should be started in mid-2022 in order to be completed in the end of December 2027. In 2022, PT. Nusantara received new capital injection from strategic investor in California, US. Next week, the financial manager of PT. Nusantara Indonesia will bring the two project’s proposals to the board of directors for their approval. The manager prepares the cost and expected cash flows generating from the project as shown in Table 1. TABLE 1 Year Project Cenderawasih A Project Cenderawasih B 0 Initial investment of USD500,000 Initial investment of USD650,000 1 Cash flow year 1 = USD150,000 Cash flow year 1 of USD170,000 2 Cash flow year 2 = USD150,000 Cash flow increased by 11% from the previous year. 3 Cash flow increased by 10% from the previous year. Cash flow increased by 11% from the previous year. 4 Cash flow increased by 10% from the previous year. Cash flow increased by 11% from the previous year. 5 Cash flow increased by 10% from the previous year. Cash flow increased by 11% from the previous year. Based on financial manager’s calculation, the cost of capital is capped at 10.5%. You are asked to help the manager to evaluate the available projects and make the most appropriate decision that would bring optimal values to the firm. Instruction: 1. What is the decision based on NPV? What is the decision based on IRR? Is there any conflict concerning the decision? 2. As you are asked to help the financial manager,

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter17: Activity Resource Usage Model And Tactical Decision Making

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Nusantara Indonesia is one of the most prestigious companies providing holiday travel packages to tourism destinations in Indonesia. The company's management is undergoing expansion strategy to cater higher demand in 2023 onward. As part of the strategy, the company is evaluating two independent projects that should be started in mid-2022 in order to be completed in the end of December 2027. In 2022, PT. Nusantara received new capital injection from strategic investor in California, US. Next week, the financial manager of PT. Nusantara Indonesia will bring the two project’s proposals to the board of directors for their approval. The manager prepares the cost and expected cash flows generating from the project as shown in Table 1.

TABLE 1

Year	Project Cenderawasih A	Project Cenderawasih B
0	Initial investment of USD500,000	Initial investment of USD650,000
1	Cash flow year 1 = USD150,000	Cash flow year 1 of USD170,000
2	Cash flow year 2 = USD150,000	Cash flow increased by 11% from the previous year.
3	Cash flow increased by 10% from the previous year.	Cash flow increased by 11% from the previous year.
4	Cash flow increased by 10% from the previous year.	Cash flow increased by 11% from the previous year.
5	Cash flow increased by 10% from the previous year.	Cash flow increased by 11% from the previous year.

Based on financial manager’s calculation, the cost of capital is capped at 10.5%. You are asked to help the manager to evaluate the available projects and make the most appropriate decision that would bring optimal values to the firm.
Instruction:

1. What is the decision based on NPV? What is the decision based on IRR? Is there any conflict concerning the decision?
2. As you are asked to help the financial manager, which project or projects will be accepted based on the calculation? Explain your reasoning.

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