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A multinational company is planning to expand its business in Karachi. For this purpose, the company is considering two business options. One is to construct a shopping mall while the other is to construct a multiplex cinema. The company has bought a suitable piece of land at the center of the city.

Being the Project Manager of the company, it is your responsibility to assist the management in the choice of either of the projects. The expected cash inflows for both projects over a period of five years have been given below:

 

Year

Shopping Mall

(Rs.)

Cinema

(Rs.)

1

300,000

420,000

2

450,000

350,000

3

550,000

230,000

4

800,000

200,000

5

850,000

250,000

 

It would cost Rs. 1,500,000 to build the Shopping Mall and Rs. 1,000,000 to build the Cinema; and both investments must be done at the start of the projects. Assume that the hurdle rate in these years would be 20% with no inflation and after the given years, projects would have no residual values.

 

Questions:

         1. You are supposed to decide which project should be selected on the basis of:

              i   Time to recover cost

              ii  Internal Rate of Return (IRR)

    2.  Would you make the same decision on the basis of both calculations? Discuss with reasons.

         3.   What other factors should you consider to select a project along with financial calculations?

 

Instructions:

  • You have to make calculations to answer the questions; and necessary working of calculations must be included in your solution.
  • Be very specific while answering the questions and give to-the-point answers.
  • Definitions and theoretical explanations of different terminologies are not required in solution.
  • The GDB will open and close at above specified dates. Please note that no grace day or extra time will be given for posting comments on GDB.
  • Use the font style “Times New Roman” and font size “12”.
  • Do not copy or exchange your answer with other students. Two identical/ copied comments will be marked Zero (0) and may damage your grade in the course.

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