ACG23 Business Finance Referencing Styles : Harvard | Pages : 5 Top Shelf Bakers Ltd. are considering two mutually exclusive investment projects with expected cash…

ACG23 Business Finance

Referencing Styles :
Harvard | Pages :
5

Top Shelf Bakers Ltd. are considering two mutually exclusive investment projects with

expected cash flows as given below:

Year

Project A Project B

($,000) ($,000)

0 -6,250 -7,000

1 2,250 3,750

2 2,000 3,500

3 1,750 3,250

4 1,500

5 1,250

Project A is an expansion of an existing product line and is considered to have the same

level of risk as other projects at Top Shelf Bakers.

Project B is an expansion into a new market and is considered much riskier than other

projects at Top Shelf. Other companies operating in this new market have a typical β = 1.6

Top Shelf’s current required rate of return = 8.0% pa.

The current market rate = Rm = 12.3% pa; The current risk-free rate is = Rf = 2.5% pa;

Requirement:

i) Which project, if any, should be selected, and why? 8 marks

ii) If the projects were not mutually exclusive, what would be your

recommendation, and why? 1 mark

iii) Discuss the causes of conflict in project evaluation measures, and how

you would determine the most appropriate measure to use when

conflict occurs (approx. 250 words)
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