Bella Ltd wishes to invest in either project X or project Y, and has provided you with the following information.           Project X Project Y       Initial Investment   Shs. 20,000 Shs. 30,000       Estimated Life   5 years 5 years         Scrap Value     Shs. 1,000 Shs. 2,000       The profits before depreciation and after taxation (cash flows) are as follows:                                 Year 1   Year 2     Year 3     Year 4   Year 5                               Project x   Shs.   Shs.   Shs.   Shs.   Shs.   5,000   10,000     10,000     3,000   2,000   Project y                   20,000   10,000     5,000     3,000   2,000                                                     Require. Given that the companies accepted Required Rate of Return (RRR) for such project is 13% p.a. Evaluate the two proposals and advise management of Bella on the best investment alternative using; The Net Present Value (NPV) Technique and The Profitability Index (PI) Technique

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Question

Bella Ltd wishes to invest in either project X or project Y, and has provided you with the following information.

 

 

 

 

 

Project X

Project Y

 

 

 

Initial Investment

 

Shs. 20,000

Shs. 30,000

 

 

 

Estimated Life

 

5 years

5 years

 

 

 

 

Scrap Value

 

 

Shs. 1,000

Shs. 2,000

 

 

 

The profits before depreciation and after taxation (cash flows) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year 1

 

Year 2

 

 

Year 3

 

 

Year 4

 

Year 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Project x

 

Shs.

 

Shs.

 

Shs.

 

Shs.

 

Shs.

 

5,000

 

10,000

 

 

10,000

 

 

3,000

 

2,000

 

Project y

 

 

 

 

 

 

 

 

 

20,000

 

10,000

 

 

5,000

 

 

3,000

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Require. Given that the companies accepted Required Rate of Return (RRR) for such project is 13% p.a. Evaluate the two proposals and advise management of Bella on the best investment alternative using;

The Net Present Value (NPV) Technique and The Profitability Index (PI) Technique

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