Capital Investment Analysis

Order Instructions

The management team of Lisa’s Linens & Furniture is considering the following capital projects:

Project

Cost

Annual cash flows

Years

New manufacturing plant

20,000,000SAR

310,000SAR

13

Machinery

320,000SAR

80,000SAR

6

Leasehold improvements

500,000SAR

118,000SAR

8

Computers

178,000SAR

497,000SAR

3

Office furniture

114,000SAR

392,000SAR

2

Company plan

800,000SAR

230,000SAR

5

Company car

240,000SAR

77,000SAR

3

Assume that each project has no salvage value, and the firm uses a discount rate of 10%. Top management has decided that only 2,200,000SAR can be spent in the current year for capital projects.

1. Compute the net present value (NPV), profitability index, and internal rate of return for each of the projects.

2. Rank the projects according to each method used in Part 1.

3. Explain how you would recommend to management of the company that the money should be spent. What would be the total NPV of your chosen investments?

4. What other methods could be used with this information to evaluate whether this project is feasible or not? How does the time value of money concept impact the cash flows and outcome?

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