Proposal for Evaluation Exercise of investment projects
The Co. de Licores Nacionales is dedicated to the production of beverages for the national and international market.
Evaluation of investment projectsAt the moment, the plant of one of its processes is dumping toxic waste into the environment, therefore, two investment projects are being considered for the replacement of said plant, which provide for the care and preservation of the environment as part of its environmental policy. The financial administration of the Cía. has collected the following information:
In addition, the following data for each project are known.
From the information collected for each project, it is requested:
- Calculate the Net Present Value. Calculate the Internal Rate of Return. Calculate the Recovery Period. Cost Benefit Index. Graphically present the Net Present Value Profile. Based on the results obtained, say which project the Company should choose. to replace the plant.Calculate the Net Present Value again considering an inflation rate of 5%, real cash flows and the nominal discount rate. Based on this result, what decision would you take?
a) Calculation of Net Present Value (NPV).
"Present value of future returns discounted at the appropriate cost of capital less the cost of investment."
"Difference between the updated value of all the FEN generated by the investment and the initial disbursement."
GO (A) = $ 887 002
Solution Project A
GO (B) = $ 1,665,473
Solution Project B
The Net Present Value of both projects is greater than zero, so both are acceptable, but since they are mutually exclusive projects, that is, the investment in one excludes that of the other, it should be invested in project B that yields a VAN higher.
b) Calculation of the Internal Rate of Return (IRR).
This situation occurs when the NPV = 0, so the IRR is defined as that discount rate that equals the NPV to zero.
IRR (A) = 32.02%
IRR (B) = 51.42%
The Internal Rate of Return of both projects is greater than the discount rate, so both are acceptable, but taking into account that they are mutually exclusive projects, project B should be invested with a higher IRR.
c) Calculation of the Recovery Period (PR).
The investment recovery period is the time it takes to recover (amortize) the initial disbursement, it will be calculated by accumulating the successive cash flows until their sum is equal to the initial disbursement.
PR (A) = 3.2 months
PR (B) = 2.2 months
You must invest in project B since it is the one with the shortest recovery period, that is, the one that recovers in a shorter period of time.
d) Calculation of the Cost Benefit Index (ICB).
This criterion relates the sum of the annual cash flows and the initial disbursement. Decision criteria: The alternative is accepted when r> 1 and the one with the largest r.
ICB (A) = 2.23
ICB (B) = 3.56
The Cost Benefit Index of both projects is greater than one, but taking into account that only one can be invested, project B is chosen because it has a higher index.
e) Graphic representation.
f) The results obtained in each of the applied methods indicate that the best project is B, which is why it is recommended to invest to replace the plant.
g) They are considering inflation.
The following formula is applied to convert the nominal discount rate into real.
GO (A) = $ 1,357,328
GO (B) = $ 2,343,030
Taking inflation into account, project B continues to provide the best result.
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