Ques. 4 Synergy Industries is expanding its product line and its production capa
ID: 2801187 • Letter: Q
Question
Ques. 4 Synergy Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm typically uses a discount rate of 16.4 percent. Calculate the NPV of both the projects. Should both projects be accepted? Or either? Or neither? Explain your reasoning. a. (4 marks) b. (4 marks) Product Line Expansion S(2,575,000) $600,000 $875,000 $875,000 $875,000 $875,000 Production Capacity Expansion S(8,137,250) $2,500,000 $2,500,000 $2,500,000 S3,250,000 $3,250,000 Year 4Explanation / Answer
NPV : Net Present Value is used to calculate the present value of future cash inflows. It is calculated using the formula as
NPV = cash flows for period 1/(1 + R)1) + (Cash flows at Year 2 / (1 + R)2) ... (Cashflows at year x / (1 + R)x) - Initial Investment
Step 1: Calculate NPV for Product Line Expansion
Initial investment = 2 575 000
Present value of future cash inflows
= 600000/(1+0.164)1 +875000/(1+0.164)2 +875000/(1+0.164)3 +875000/(1+0.164)4+875000/(1+0.164)5 - Initial investment
= 2602222.17105 - 2 575 000 = 27222.17105
NPV is positive. So We can accept the project.
2) Product Capacity expansion initial investment = 8 137 250
Present value of future cash inflows
= 2500000/(1+0.164)1 +2500000/(1+0.164)2 +2500000/(1+0.164)3 +3250000/(1+0.164)4+3250000/(1+0.164)5 - Initial investment = 8869477.95245 - 8 137 250 = 732227.95245
Both projects can be accepted because if the NPV value is positive. In this problem, both projects shows positive value of NPV. Therefore both can be accepted.