question archive A company is planning to expand its present business activity
A company is planning to expand its present business activity
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A company is planning to expand its present business activity. It has two alternatives for the expansion programme and the corresponding cash flows are tabulated below. Each alternative has a life of five years and a negligible salvage value. The minimum attractive rate of return for the company is 12%. Suggest the best alternative to the company. Alternative Initial Investment Yearly Revenue (Php) (Php) 1 500,000 170,000 N 800,000 270,000
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To find out most profitable alternative , one shall compute net present value of each alternative
Statement showing NPV of Alternative 1
| Year | Cash flow | PVIF @ 12% | PV |
| A | B | C = A x B | |
| 1 | 170000.00 | 0.8929 | 151785.71 |
| 2 | 170000.00 | 0.7972 | 135522.96 |
| 3 | 170000.00 | 0.7118 | 121002.64 |
| 4 | 170000.00 | 0.6355 | 108038.07 |
| 5 | 170000.00 | 0.5674 | 96462.57 |
| Sum of PV of cash inflow | 612811.95 | ||
| Less: Initial Investment | 500000.00 | ||
| NPV | 112811.95 |
Thus NPV of alternative 1 = 112811.95 $
Statement showing NPV of Alternative 2
| Year | Cash flow | PVIF @ 12% | PV |
| A | B | C = A x B | |
| 1 | 270000.00 | 0.8929 | 241071.43 |
| 2 | 270000.00 | 0.7972 | 215242.35 |
| 3 | 270000.00 | 0.7118 | 192180.67 |
| 4 | 270000.00 | 0.6355 | 171589.88 |
| 5 | 270000.00 | 0.5674 | 153205.25 |
| Sum of PV of cash inflow | 973289.57 | ||
| Less: Initial Investment | 800000.00 | ||
| NPV | 173289.57 |
Thus NPV of alternative 2 = 173289.57 $
Thus Alternative 2 should be selected as it has higher NPV
