MGT201 Assignment #1 Fall 2012 (15-11-2012)

[abdulsaboor]

Capital Budgeting Techniques for Projects with Unequal Lives
Learning Objectives - The students are expected to understand the application of usual capital budgeting techniques applied particularly to the projects with unequal lives. Learning Outcomes - After going through this activity, the student would be able to apply capital budgeting techniques especially in the case of projects with unequal lives. Case: Fiber Limited (FL) is involved in processing of cotton and sale of fiber to the country’s textile sector. On the basis of a recent market research, Fiber has found two mutually exclusive projects – Theta and Gamma. The cash flows associated with these projects are:
projects – Theta and Gamma.The cash flows associated with these projects are: Project Cash Flows (Rs. ‘000) FY- 0 FY-1 FY-2 FY-3 FY-4 FY-5 FY-6 Theta(40,000) 8,00014,00013,0005,00011,000 10,000Gamma(18,000) 9,00015,10012,000--- --- ---
Discount rate for both projects is 8.4%. The management of FL wants to undertake only one project. Required 1. Determine the viability of both projects by applying Common life approach and Equivalent Annuity Approach method (EAA). (11 + 6) 2. Which project would be feasible for Fiber Limited and why? (3) Hint: Formula for calculating EAA is PV ÷ [{1-(1+i)-n} ÷ i]


Show formulas and complete calculations as they carry marks.