The management team of Lisa’s Linens & Furniture is considering the following capital projects:
| Project |
Cost |
Annual cash flows |
Years |
|||
|
New manufacturing plant |
2 |
3 |
13 |
|||
|
Machinery |
320,000SAR |
8 |
6 |
|||
|
Leasehold improvements |
5 |
118,000SAR |
||||
|
Computers |
178,000SAR |
497,000SAR |
||||
|
Office furniture |
114,000SAR |
392,000SAR |
||||
|
Company plan |
800,000SAR |
230,000SAR |
||||
|
Company car |
240,000SAR |
77,000SAR |
Assume that each project has no salvage value, and the firm uses a discount rate of 10%. Top management has decided that only 2,200,000SAR can be spent in the current year for capital projects.
1. Compute the net present value (NPV), profitability index, and internal rate of return for each of the projects.
2. Rank the projects according to each method used in Part 1.
3. Explain how you would recommend to management of the company that the money should be spent. What would be the total NPV of your chosen investments?
4. What other methods could be used with this information to evaluate whether this project is feasible or not? How does the time value of money concept impact the cash flows and outcome?
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