Question

# A manager  of “Safola Co. “ ask your advice to evaluate 3 projects, consider the following information...

A manager  of “Safola Co. “ ask your advice to evaluate 3 projects, consider the following information to determine the project the manager should be select by the following criteria’s:

2. Equivalent Certainty Factor CF

 Projects A B C Cost 100000 150000 200000 Expected of cash inflows 20000 25000 30000 Life( years) 7 9 10 Level of risk ( c.v) 0.24 0.34 0.18

Safola Co. usually uses the following discount rates 10%, 7%, 12%,  and certainty factors 0.633, 0.742, 0.543.

 Solution : Calculation fo Net present value using certainty factors Amount in \$ Projects A B C (a)Annual Cash inflow 20000 25000 30000 (b) Certainty equivalent(Certainty factors) 0.633 0.742 0.543 (c ) Adjusted cash inflow(a*b) 12660 18550 16290 Discount Rate 10% 7% 12% Life 7 9 10 (d) Present value of annuity factor 4.8684 5.8852 5.6502 (e) Present value of Adjusted cash inflows (c*d) 61634 109170 92042 Less: Initial Cost -100000 -150000 -200000 Net Present Value (NPV) -38366 -40830 -107958 Selection criteria should be: project which has positive NPV However, in a given case, Non of the project has positive NPV. Further, Project A has lower negative NPV which is best option out of 3 projects.

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