FINANCIAL MANAGEMENT 332
PROBLEM: MUTUALLY EXCLUSIVE PROJECTS
PropCo Ltd, a property development company, was approached by Stellendam
University to construct new student residences. According to an agreement, a
piece of land that belongs to the university will be purchased now at R800 000.
PropCo Ltd will construct student housing on this piece of land, and rent it to
students for the next 30 years. At the end of the 30-year period the buildings
will be demolished and the piece of land sold back to Stellendam University
at R800 000. Ten different housing options are being considered, ranging
from a cluster of small private student houses to a ten-storey apartment block,
with construction costs ranging from R750 000 to R7 200 000. Assume that
the company’s cost of capital amounts to 10% per year. The relevant cash
flows for the ten mutually exclusive options are presented in the table below:
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
Calculate the net present value (NPV), equivalent uniform annual cost (EUAC)
and the internal rate of return (IRR) associated with each of the ten mutually
exclusive options. Assume the company’s cost of capital amounts to 10% per
year. Also indicate which option should be accepted based on the three
evaluation techniques.
IRR:
NPV:
OPTION 1
-1 700 000 Cf0
+190 000 Cf1
29 Nj
+190 000
+700 000 +890 000 Cf2
Shift
=
EUAC:
OPTION 1
-1 700 000 Cf0
+190 000 Cf1
29 Nj
+890 000 Cf2
IRR/YR
I/YR
10%
10.87%
Shift
NPV
=
131 230
Shift
C ALL
131 230
PV
30
N
10%
I/YR
PMT =
13 921
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
?
FIRST ROUND:
• Consider the IRR of each individual project
• Eliminate all projects where:
IRRProject < Cost of capital
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
SECOND ROUND:
• Compare the cheapest option (Option 1)
with the next cheapest option (Option 3)
• Will only move from the cheaper option to a
more expensive option if:
IRRINCR > Cost of capital
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
Cf0
Cf1
Nj
Cf2
OPTION 3
-2 145 000
+225 000
29
+1 100 000
OPTION 1
-1 700 000
+190 000
29
+890 000
Cf0
Cf1
Nj
Cf2
OPTION 3
-2 145 000
+225 000
29
+1 100 000
OPTION 1
-1 700 000
+190 000
29
+890 000
(3 – 1)
-445 000
+35 000
29
+210 000
Cf0
Cf1
Nj
Cf2
OPTION 3
-2 145 000
+225 000
29
+1 100 000
OPTION 1
-1 700 000
+190 000
29
+890 000
(3 – 1)
-445 000
+35 000
29
+210 000
IRR3-1 = 7.25%
< 10%
 Moving from 1 to 3 earns LESS than the cost of capital
 Keep 1; Reject 3
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
Cf0
Cf1
Nj
Cf2
OPTION 4
-2 250 000
+260 000
29
+1 100 000
OPTION 1
-1 700 000
+190 000
29
+890 000
Cf0
Cf1
Nj
Cf2
OPTION 4
-2 250 000
+260 000
29
+1 100 000
OPTION 1
-1 700 000
+190 000
29
+890 000
(4 – 1)
-550 000
+70 000
29
+210 000
Cf0
Cf1
Nj
Cf2
OPTION 4
-2 250 000
+260 000
29
+1 100 000
OPTION 1
-1 700 000
+190 000
29
+890 000
(4 – 1)
-550 000
+70 000
29
+210 000
IRR4-1 = 12.44%
> 10%
 Moving from 1 to 4 earns MORE than the cost of capital
 Reject 1; Accept 4
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
Cf0
Cf1
Nj
Cf2
OPTION 5
-2 530 000
+375 000
29
+1 255 000
OPTION 4
-2 250 000
+260 000
29
+1 100 000
(5 – 4)
-280 000
+115 000
29
+155 000
IRR5-4 = 41.07%
> 10%
 Moving from 4 to 5 earns MORE than the cost of capital
 Reject 4; Accept 5
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
Cf0
Cf1
Nj
Cf2
OPTION 6
-2 840 000
+430 000
29
+1 260 000
OPTION 5
-2 530 000
+375 000
29
+1 255 000
(6 – 5)
-310 000
+55 000
29
+5 000
IRR6-5 = 17.58%
>
10%
 Moving from 5 to 6 earns MORE than the cost of capital
 Reject 5; Accept 6
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
Cf0
Cf1
Nj
Cf2
OPTION 8
-5 250 000
+750 000
29
+1 350 000
OPTION 6
-2 840 000
+430 000
29
+1 260 000
(8 – 6)
-2 410 000
+320 000
29
+90 000
IRR8-6 = 12.90%
>
10%
 Moving from 6 to 8 earns MORE than the cost of capital
 Reject 6; Accept 8
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
Cf0
Cf1
Nj
Cf2
OPTION 9
-6 750 000
+900 000
29
+1 520 000
OPTION 8
-5 250 000
+750 000
29
+1 350 000
(9 – 8)
-1 500 000
+150 000
29
+170 000
IRR9-8 = 9.32%
< 10%
 Moving from 8 to 9 earns LESS than the cost of capital
 Reject 9; Accept 8
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
Cf0
Cf1
Nj
Cf2
OPTION 10
-8 950 000
+1 100 000
29
+1 600 000
OPTION 8
-5 250 000
+750 000
29
+1 350 000
(10 – 8)
-3 700 000
+350 000
29
+250 000
IRR10-8 = 8.66%
< 10%
 Moving from 8 to 10 earns LESS than the cost of capital
 Reject 10; Accept 8
1
Purchase of land
Construction of buildings
Net working capital investment
INITIAL INVESTMENT
-800 000
-750 000
-150 000
2
-800 000
-900 000
-250 000
3
4
5
6
7
8
9
10
-800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000 -800 000
-970 000 -1 050 000 -1 250 000 -1 520 000 -2 150 000 -3 700 000 -5 150 000 -7 200 000
-375 000 -400 000 -480 000 -520 000 -610 000 -750 000 -800 000 -950 000
-1 700 000 -1 950 000 -2 145 000 -2 250 000 -2 530 000 -2 840 000 -3 560 000 -5 250 000 -6 750 000 -8 950 000
Annual operating cash inflow
Annual operating cash outflow
350 000
-160 000
500 000
-330 000
575 000
-350 000
700 000
-440 000
850 000
-475 000
1 120 000 1 750 000 3 250 000 3 850 000 6 050 000
-690 000 -1 445 000 -2 500 000 -2 950 000 -4 950 000
ANNUAL OPERATING CASH FLOW
190 000
170 000
225 000
260 000
375 000
430 000
305 000
750 000
900 000
1 100 000
Sale of land
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
800 000
Demolition of buildings
Net working capital investment
-250 000
150 000
-270 000
250 000
-300 000
375 000
-360 000
400 000
-400 000
480 000
-490 000
520 000
-700 000
610 000
-950 000
750 000
-980 000 -1 250 000
800 000
950 000
TERMINAL CASH FLOW
700 000
780 000
875 000
840 000
880 000
830 000
710 000
600 000
620 000
500 000
IRR
10.87%
8.21%
10.14%
11.26%
14.66%
14.98%
7.84%
14.04%
13.03%
11.89%
NPV
131 230
-302 724
26 201
249 137
1 055 524
1 261 139
-644 102
1 854 571
1 769 754
1 448 260
EUAC
13 921
-32 113
2 779
26 428
111 969
133 781
-68 326
196 731
187 734
153 630
FINAL RECOMMENDATION:
• Project 8 would offer the greatest financial
benefits, with IRR8 = 14.04%
• Also reflected by the highest NPV
(R1 854 571)
FINAL RECOMMENDATION:
• Project 8 would offer the greatest financial
benefits, with IRR8 = 14.04%
• Also reflected by the highest NPV
(R1 854 571)
NB: Project 8 DOES NOT have the HIGHEST IRR
(IRR6 = 14.98%; IRR5 = 14.66%)