Salalah Chemical Company is considering two proposals for long term investment. Both will operate for 5 years, but due to limitation on capital the company can accept only one out two projects. The following information is available relating to : Initial investment Methanol project Fertilizer Project RO RO (100,000) (100,000) Operating Profit before depreciation year 1 60,000 54,000 Operating Profit before depreciation year 2 50,000 46,000 Operating Profit before depreciation year 3 40,000 40,000 Operating Profit before depreciation year 4 30,000 36,000 Operating Profit before depreciation year 5 25,000 25,000 Scrap value at the end of 5 years 10,000 10,000 The company’s standard payback period is 2.5 years and standard ARR is 12%. The cost of capital is 10%? Required: A)Calculate Profitability Index for both projects. B) Calculate IRR of Methanol and Fertilizer project NPV is negative RO 1,956 @ 40% for Menthol Project NPV is negative RO 5,359 @ 40% for Fertilizer Project C) Present the overall results of above in a table and recommend one best proposal to management. Give recommendation for your recommendation
- Salalah Chemical Company is considering two proposals for long term investment. Both will operate for 5 years, but due to limitation on capital the company can accept only one out two projects. The following information is available relating to :
Initial investment |
Methanol project |
Fertilizer Project |
RO |
RO |
|
(100,000) |
(100,000) |
|
Operating Profit before |
60,000 |
54,000 |
Operating Profit before depreciation year 2 |
50,000 |
46,000 |
Operating Profit before depreciation year 3 |
40,000 |
40,000 |
Operating Profit before depreciation year 4 |
30,000 |
36,000 |
Operating Profit before depreciation year 5 |
25,000 |
25,000 |
Scrap value at the end of 5 years |
10,000 |
10,000 |
The company’s standard payback period is 2.5 years and standard ARR is 12%. The cost of capital is 10%?
Required:
A)Calculate Profitability Index for both projects.
B) Calculate
NPV is negative RO 5,359 @ 40% for Fertilizer Project
C) Present the overall results of above in a table and recommend one best proposal to management. Give recommendation for your recommendation.
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