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: (i) Calculate Accounting Rate of Return for both Methanol and Fertilizer project. (ii) Calculate Payback Period of Project Methanol and Fertilizer. (iii) Calculate the NPV of Methanol and Fertilizer project.
- 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:
(i) Calculate Accounting
(ii) Calculate Payback Period of Project Methanol and Fertilizer.
(iii) Calculate the
|
Year |
1 |
2 |
3 |
4 |
5 |
|
PV Factor @ 10% |
0.909 |
0.826 |
0.751 |
0.683 |
0.621 |
(iv) Calculate Profitability Index for both projects.
(v) Calculate
- NPV is negative RO 1,956 @ 40% for Menthol Project
- NPV is negative RO 5,359 @ 40% for Fertilizer Project
(vi) 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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