Exercise 57 Profitability Assessment and Investment Timing Decisions

a) There is a choice between two investment projects, A and B, having the following data at time t = 0:

Project

A

B

Initial investment outlay (€)

240,000

190,000

Liquidation value at the end of its useful life (€)

20,000

10,000

Useful life (years)

4

4

Net cash flows (€)

t = 1

75,000

50,000

t = 2

75,000

55,000

t = 3

70,000

60,000

t = 4

70,000

65,000

Tab. 5-17: Data for the two investment projects A and B

Tab. 5-17: Data for the two investment projects A and B

Assume a uniform discount rate of 10%. Assess the absolute and relative profitability of the projects using the net present value method.

b) There is now an opportunity to invest in project B at time t = 1. A €15,000 reduction of the initial outlay compared to the realisation at t = 0 is expected. All other data given in part a) of this exercise remain unchanged. b1) What is the optimum investment policy now? (Support the finding with appropriate calculations.) b2) Which assumption in the basic net present value method is no longer valid? b3) How can this expanded decision problem b) be solved using the VoFI method (brief description)?

Part IV

Multi-Criteria Methods and Simultaneous Decision-Making

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Sell Your Annuity

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