NextG Limited is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects typically have a short life as it introduces new models periodically. You have recently joined NextG Limited as a financial analyst reporting to Mr. Atiamoh, the CFO of the company. He has provided you the following information about two mutually exclusive projects. A and B, that are being considered by the Executive Committee of NextG Limited: Project A is an extension of an existing line. Its cash flow will decrease over time. Project B involves a new product. Building its market will take some time and hence its cash flow will increase over time. The expected net cash flows of the two mutually exclusive projects are as follows. Mr. Atiamoh believes that all the two projects have risk characteristics similar to the average risk of the firm and hence NextG’s cost of capital of 10 percent will apply to them and both investment projects have zero scrap value. The company’s current return on capital employed is 12 percent (average investment basis) and the company uses straight-line depreciation over the life of projects. Year Project (A) Project (B) Gh₵ Gh₵ 0 (110,000) (200,000) 1 45,000 50,000 2 45,000 50,000 3 30,000 50,000 4 30,000 100,000 5 20,000 55000 a) Advise NextG’s executive committee which project should be undertaken if: i. the net present value method of investment appraisal is used; ii. the internal rate of return method of investment appraisal is used; b) Critically discuss the reasons for the superiority of the net present value method over the other methods. Is the internal rate of return method now redundant?
NextG Limited is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects typically have a short life as it introduces new models periodically. You have recently joined NextG Limited as a financial analyst reporting to Mr. Atiamoh, the CFO of the company. He has provided you the following information about two mutually exclusive projects. A and B, that are being considered by the Executive Committee of NextG Limited:
Project A is an extension of an existing line. Its cash flow will decrease over time. Project B involves a new product. Building its market will take some time and hence its cash flow will increase over time.
The expected net cash flows of the two mutually exclusive projects are as follows. Mr. Atiamoh believes that all the two projects have risk characteristics similar to the average risk of the firm and hence NextG’s cost of capital of 10 percent will apply to them and both investment projects have zero scrap value. The company’s current return on capital employed is 12 percent (average investment basis) and the company uses straight-line
Year Project (A) Project (B)
Gh₵ Gh₵
0 (110,000) (200,000)
1 45,000 50,000
2 45,000 50,000
3 30,000 50,000
4 30,000 100,000
5 20,000 55000
a) Advise NextG’s executive committee which project should be undertaken if:
i. the
ii. the internal rate of
b) Critically discuss the reasons for the superiority of the net present value method over the other methods. Is the internal rate of return method now redundant?
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