Question

You are a consulting firm intern and your job is to help a client choose investment projects. Your client, RealEstate, is a young and growing commercial and residential real estate firm. After reading through all the related information of those projects, you have compiled the following cash flow projections:CFO CF1 CF2 CF3 project 1 100 50 50 50 project 2 -80 40 45 50 project 3 -70 30 40 50 project 4 -60 30 40 60 project 5 -50 25 30 70CF0 denotes the initial investment. CF1 is the cash flow at the end of the first year. CF2 is the cash flow at the end of the second year, and so on. The units are millions of dollars.You were told that the opportunity cost of capital for all these projects is 35%. Which project(s) should you reject? (choose all that apply)(a)Project 1(b)Project 2(c)Project 3(d)Project 4(e)Project 5(f)None

Answer 1

Answer:

Project 1, 2 and 3 should be rejected.

Explanation:

This problem required us to tell which project we should not accept. To solve this we have to apply this rule that is accept the project with positive NPV.

The detail calculation are given below.

The discount factors to be used for CFO, CF1, CF2 and CF3 is 1, 0.74, 0.55 and 0.41 respectively. It is calculated by using following formula.

               DF= (1 + i)^-n (n is period and i is 35%)

So now calculating NPV of each project by multiplying cashflow with discount factor.

Project 1 = -100+ (50*0.74 ) + (50*0.55) + (50*0.41) = -15 M dollars

Project 2 = -80 + (40*0.74) + (45*0.55) + (50*0.41) = -5.15 M dollars

Project 3 = -70 + (30 *0.74) + (40*0.55) + (50*0.41) = -5.3 M dollars

Project 4 = -60 + (30 *0.74) + (40*0.55) + (60*0.41) = 8.8 M dollars

Project 5 = -50 + (25 *0.74) + (30*0.55) + (70*0.41) =  13.7 M dollars