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 Capital Budgeting Techniques for Projects with Unequal Lives

Learning Objectives - The students are expected to understand the application of usual capital budgeting techniques applied particularly to the projects with unequal lives. Learning Outcomes - After going through this activity, the student would be able to apply capital budgeting techniques especially in the case of projects with unequal lives. Case: Fiber Limited (FL) is involved in processing of cotton and sale of fiber to the country’s textile sector. On the basis of a recent market research, Fiber has found two mutually exclusive projects – Theta and Gamma. The cash flows associated with these projects are:

projects – Theta and Gamma.The cash flows associated with these projects are: Project Cash Flows (Rs. ‘000) FY- 0 FY-1 FY-2 FY-3 FY-4 FY-5 FY-6 Theta(40,000) 8,00014,00013,0005,00011,000 10,000Gamma(18,000) 9,00015,10012,000--- --- ---

Discount rate for both projects is 8.4%. The management of FL wants to undertake only one project. Required 1. Determine the viability of both projects by applying Common life approach and Equivalent Annuity Approach method (EAA). (11 + 6) 2. Which project would be feasible for Fiber Limited and why? (3) Hint: Formula for calculating EAA is PV ÷ [{1-(1+i)-n} ÷ i] Show formulas and complete calculations as they carry marks.

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Assignment Solution with all calculations..............

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