Reference no: EM132744739

Question - 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 -

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

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

3. Determine the project with the highest risk.