- 15 Marks
PM – Nov 2021 – L2 – Q5 – Decision-Making Techniques
Calculate and compare the expected net present value of two projects under uncertainty.
Question
Gaskiya Nigeria Limited is considering whether or not to invest in any of the two projects where the initial cash investment would be ₦13,000,000 for A and ₦14,000,000 for B. The projects would have a five-year life and the estimated annual cash flows are as follows:
| Year | Project A (N) | Project A Outflows (N) | Project B (N) | Project B Outflows (N) |
|---|---|---|---|---|
| 1 | 6,000,000 | 3,000,000 | 10,000,000 | 5,000,000 |
| 2 | 8,000,000 | 4,000,000 | 9,000,000 | 4,000,000 |
| 3 | 10,000,000 | 4,000,000 | 8,000,000 | 3,000,000 |
| 4 | 9,000,000 | 3,000,000 | 8,000,000 | 3,000,000 |
| 5 | 6,000,000 | 3,000,000 | 4,000,000 | 2,000,000 |
The company’s cost of capital is 10%. Several factors could impact the inflows:
- Factor 1: 20% probability of government measures reducing inflows by 25%.
- Factor 2: 30% probability of a competitor entering the market, reducing inflows by 10%.
- Factor 3: 40% probability of stronger-than-expected demand, increasing inflows by 5%.
Required:
a. Calculate the expected net present value of the two projects. (13 Marks)
b. Which of the projects will be more profitable? (2 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Expected Value, Net Present Value, Project Appraisal, Risk analysis
- Level: Level 2
- Topic: Decision-making techniques
- Series: NOV 2021
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