Determine the project with the highest risk

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Reference no: EM132762163

A company intends to invest in project M and Y whose original cost sh. 140 million and sh. 175 million respectively. Installation charges for M is sh. 2 million and transportation of sh. 1 million while for Y installation costs will be sh. 800,000 and transportation of sh. 156,000. The working capital recouped at end of 5 years for both projects is sh. 680,000. A Project manager will earn a salary of sh. 100,000 per month to run both projects hence should be share proportionately. Investors in the company are demanding a rate of compensation of 14 % and the company pays tax at the rate is 30%. Depreciation is on cost at the rate of 10% with residue value of sh.400,000 for Project M and non for Project Y.

The expected cash flows and probability is as follows:

Project M      Probability       Project Y
Year 1 sh. 12 Million 0.2    14 Million
Year 2 sh. 10 Million 0.1    12 Million
Year 3 sh. 8 Million 0.3 10 Million
Year 4 sh. 13 Million 0.2 6 Million
Year 5 sh. 9 Million 0.2    4 Million

The company expects to abandon the projects with the following values

Project M Project Y

Year 1 sh. 130 Million 140 Million
Year 2 sh. 115 Million 120 Million
Year 3 sh. 100 Million 90 Million
Year 4 sh. 80 Million. 60 Million

Required

Problem 1. What is the Net Present Value of the projects, should the projects be undertaken

Problem 2. Suppose the Company wants to abandon the projects, assess which year is the best for such decision

Problem 3. Determine the project with the highest risk

Reference no: EM132762163

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