MGT201 Assignment 1 Solution fall 2017

AMS manufacturer is considering to expand its business by installing a new production unit. Management is considering two options for new production unit; both suppliers are claiming their offer as best in terms of less cost and more future inflows. To analyze the feasibility of two options, management has to take decision on the basis of NPV and payback period of two investment options. Details of two production units are given below:
Year Cash Flows (Option 1) in Rs. Cash Flows (Option 2) in Rs.
0 -1,200,000 -1,200,000
1 500,000 400,000
2 300,000 500,000
3 300,000 450,000
4 400,000 350,000
Being the student of financial management; you have to help company to choose the best option between above two mutually exclusive options (1 and 2), if interest rate is 12%. Your decision should be based on following criteria:
1. If you apply Net present value (NPV) criterion, you will select which project and why? (5.5+5.5+1 marks)
2. If you apply payback period criterion, you will select which project and why (5+5+1 marks)
3. If management wants to take an option that is most liquid; you will select which project for AMS and why? (1 mark)
4. Is it rational to take decision solely on the basis of capital budgeting techniques? Why or why not? (1 mark)
Formula and complete working of each part is mandatory; marks will be deducted in case on incomplete calculations

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