- 10 Marks
PSAF – May 2021 – L2 – Q3b – Fiscal Policy and Public Finance
NPV-based investment recommendation for Omidan Local Government among three projects and a risk-free security alternative.
Question
Omidan Local Government Council has N20,000,000 to invest, if there is an assurance that the investment will earn at least 12% p.a. In view of this, the following projects are being considered:
- Project A will earn N21,800,000 at the end of year one with a residual value of N1,500,000;
- Project B will earn N24,000,000 at the end of year two with a residual value of N500,000; and
- Project C will earn N14,000,000 at the end of year one and another N10,000,000 at the end of year two with no residual value.
If none of the projects is undertaken, Omidan Local Government Council will invest the N20,000,000 in a risk-free security that will earn interest of 12% p.a.
Required:
Assess and advise Omidan Local Government Council on which of the projects to be undertaken using Net Present Value (NPV) method.
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