MGT201 GDB 1 Solution Spring 2018

Discussion Question:

Suppose you are a new employee in the finance department of a well-known firm. Management of the firm has assigned you a task to select a Plan on the basis of Profitability index (PI) criterion (one of the capital budgeting techniques). Management has given you two alternate plans; Plan A with old technology and Plan B with new technology. Primarily both plans have identical life and interest rates, but with the use of new technology the initial investment of the plan B will increase by 14% (compared to Plan A) while its cash inflows will increase by 10% each year (compared to Plan A).

Particulars Plan A (Amount in Rs.) Plan B (Amount in Rs.)
Initial investment 500,000 ?
Cash flow year 1 120,000 ?
Cash flow year 2 216,000 ?
Cash flow year 3 300,000 ?
Interest rate per annum 10%
  1. Based on above given information about Plan A; complete the table for plan B.
  2. Calculate PI of both projects (Complete Calculations of PI for both projects is mandatory as it carries marks; marks will be deducted on providing just answers)
  3. Based on calculations of PI which plan you will suggest and why?(Your selection should be supported with logical reasoning; no marks will be given on just selection of the project)