Question 1 - Suppose your manager has asked you to evaluate two investment opportunities that your company is considering. Using the information below, evaluate these two investments using the net present value method. As a result of your evaluation, will you need to make a recommendation to your manager about the relative attractiveness of these investments?
Project A B
Cost of Investment € 3.000.000 € 2.000.000
Useful life of investment 4 4
Estimated residual value € 500.000 € 0
Expected annual cash flows € 900.000 € 1.100.000
Cost of capital 5% 10%
1. Calculate the net present value for each investment.
2. Based on your calculations above, briefly explain which investment is the most attractive one for your company and why.
Question 2 - Fun Time Corporation operates amusement parks. The company is considering investing in a new ride. The ride would cost €450.000 and has an expected useful life of 5 years. Management expects that the addition of the ride will increase net annual cash flows from operations by € 150.000. Finally, it is expected that the ride will be sold at the end of 5 years to an independent fair operator for €50.000. The company's cost of capital is 10%.
Calculate the net present value of this investment.