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Answer to Question #89172 in Financial Math for farzana

Question #89172
4.Three alternative projects have initial costs and revenues (each in thousands of Malaysian ringgit-RM) for the next five years as shown below:
Project Initial Cost Net revenue in each year
1 2 3 4 5
A 1000 500 400 300 200 100
B 1000 200 200 300 400 400
C 500 500 200 200 100 50
a.Using conventional accounting, use average rate of return as a percentage of initial investment to determine which project to be undertaken.
b.If the company has enough resources to start only one project, use discounting rate of 10% to suggest the best.
c.Aside quantitative factors for choosing a project, what qualitative factors would you consider in choosing the particular project?
Expert's answer

a.

A

average rate of return = (500+400+300+200+100)/5/1000*100% =30%

B

average rate of return = (200+200+300+400+400)/5/1000*100% =30%

C

average rate of return = (500+200+200+100+50)/5/500*100% =42%

 

Project C is the best because 42%>30%

b.

The best is discounting rate of 10%

A

FV = (1000-500*1.1+400*1.12+300*1.13+200*1.14+100*1.15)/1000*100% =156%

B

FV = (1000-200*1.1+200*1.12+300*1.13+400*1.14+400*1.15)/1000*100% =225%

C

FV = (500-500*1.1+200*1.12+200*1.13+100*1.14+50*1.15)/500*100% =114%

The best is B

c.

Factors affecting the project selection process:

 

1) reliability of preliminary calculations of benefits, costs and probability of project success;

 

2) the technical quality of the project is determined by a subjective rating, which identifies five factors:

 

• clarity of project objectives;

 

• extent of technical obstacles;

 

• extent of existing institutional or market barriers;

 

• adequacy of the skill level of existing personnel and technical equipment;

 

• if the project is successful, how easy it is to find a new technology, process or service;

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