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Topic : Capital budgeting Techniques

Discussion Question:

Suppose you are working in the finance department of a well-reputed organization. Management of the organization has given you two alternate projects and assigned you a task to select a short-term project on the basis of Net Present Value (NPV).  The life span of both projects is different which causes the problem for accurate selection of a project. It is the norm of the industry if the projects have different life span; there are two standard methods to equate them at one point of time. First is the Common Life Approach (CLA); second is Equivalent Annual Annuity Approach (EAA) as both provide better result in case of uneven lives of projects under consideration.

 Following information has been provided about two projects by the management:

Project

Initial investment

(Rs)

Cash flow year 1

(Rs)

Cash flow year 2

(Rs)

NPV

(Rs)

A

500,000

1,000,000

-

392,857

B

1,000,000

1,000,000

1,000,000

690,051

 

NPV under Common Life Approach (CLA)

 

Project

Initial investment

 

Cash flow year 1

(Rs)

Cash flow year 2

(Rs)

NPV

(Rs)
 

A

500,000

1,000,000

-

743,622.5

B

1,000,000

1,000,000

1,000,000

690,050.9

Requirements:

You are advised to calculate NPV by EAA method if discount rate is 12% and suggest best one to the management along with the solid reason.

  1. Calculate EAA FACTOR of both projects.
  2. Calculate NPV of both projects by EAA Approach.
  3. Based on the calculations, which project you will suggest and why? Do CLA and EAA methods have led to same decision about the selection of project? (Your selection should be supported with logical reasoning)

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MGT201 GDB Solution

Attachments:

MGT201 Financial Management GDB 1 Solution Spring 2019.

 

Attachments:

MGT101 FINANCIAL ACCOUNTING Assignment No. 1 Solution Spring 2019 22-May-201

Attachments:

Idea solution GDB mgt 201

MGT201 GDB Solution 2019 Spring

Attachments:

MGT201 GDB Solution 2019

Attachments:

SOLUTION GDB No. 1 (MGT201 - Financial Management) Spring 2019

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