Question -
Northern Star Company sets a hurdle rate of 14% per annum for evaluating investment proposals. Currently, it is considering three competing proposals and does believe that it will have sufficient finance to fund all three. Details of the proposals, all of which will cover a five year term, are given below:
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A
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B
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C
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Investment cost
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$400,000
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$750,000
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$600,000
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Estimated annual net cash inflow (per annum)
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$125,000
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$225,000
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$195,000
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REQUIRED -
(a) Calculate the Net Present Value (NPV) for the 3 investment proposals. Ignore tax implications.
(b) In your own words interpret the meaning of the net present value figures calculated above and rank the 3 investment proposals in order, nominating which investment/s you would accept or reject justifying your answer. (60 words limit)
(c) The factory manager at Northern Star says she has heard that the data used in NPV calculations can be unreliable, especially estimates of future cash flows, and that alternative methods of assessing a capital investment would be more reliable. Discuss in your own words the limitations and advantages of NPV analysis over other alternative capital evaluation techniques reviewed throughout the semester. (180 words limit)