Overview
The management team of Lisa’s Linens & Furniture is considering the following capital projects:
Project | Cost (SAR) | Annual cash flows (SAR) | Years |
New manufacturing plant | 2,000,000 | 310,000 | 13 |
Machinery | 320,000 | 80,000 | 6 |
Leasehold improvements | 500,000 | 118,000 | 8 |
Computers | 178,000 | 497,000 | 3 |
Office furniture | 114,000 | 392,000 | 2 |
Company plan | 800,000 | 230,000 | 5 |
Company car | 240,000 | 77,000 | 3 |
Assume that each project has no salvage value, and the firm uses a discount rate of 10%. Top management has decided that only SAR 2,200,000 can be spent in the current year for capital projects.
1. For each of the projects, compute the net present value (round to two decimal points), profitability index (round to three decimal points), and internal rate of return (round to two decimal points).
Discount Rate: 10%
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. Would your answer to Part 3 be different if there was no limit to capital spending? Explain.
Requirements:show all. Working and explanatatioms