For this topic, you are provided with details of two mutually exclusive projects for Keon Ltd.
You are an advisor to Keon and need to provide a recommendation, as to which project Keon should undertake, if either. Your advice will be set out in a brief report.
The details of the two projects are provided in the first thread. (Blackboard will not let me attach the project details in this space!)
You will need to use Excel to do the analysis. Please attach your Excel workings as an attachment to your report. Your report is to be directly readable in your thread.
In your report, give the NPV for each project, and your recommendation. You may add further details as to how you went about doing the analysis, but do keep your report brief.
Your excel spreadsheet should be set out clearly so that the person commenting on your answer can follow what you have done.
Keon Ltd has two mutually exclusive projects under consideration.
Both projects can be considered replacement projects.
The details of the projects are given in the table below.
Project A Project B
Development costs to date $125,000 $135,000
Life of project 4 years 5 years
Depreciation Straight line, fully over life of project Straight line, fully over life of project
Machine cost $2.4 million $3.5million
Residual No residual No residual
Working capital needs Injection of $250,000 at beginning of project One injection only of $500,000 at beginning of project
Further injection of $150,000 at the end of year 1
Sales $1.3m for each year of the project $1.57 m for each year of the project
Cost of sales $0.23m for each year of the project $0.345m for each year of the project
Other costs $0.016m for each year of the project $0.026m for each year of the project
Finance needs Yule Ltd would need to borrow $1m for 3 years at 7% p.a. Yule Ltd would need to borrow $1.1m for 4 years at 7% p.a.
Tax rate 25% 25%
Discount rate for project 12.5% 12.5%
There is no inflation.
Use NPV analysis to advise Keon Ltd as to which project, if either, should be adopted.