Ques. 4 Synergy Industries is expanding its product line and its production capa

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 $(8,137,250) $2,500,000 $2,500,000 $2,500,000 S3,250,000 $3,250,000 Year 2 4

Explanation / Answer

NPV of product line expansion:

NPV of production capacity expansion:

Since NPV of both projects are positive, both can be accepted.

Decision rule under NPV: Accept if NPV is positive, Reject if NPV is negative.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial investment         (25,75,000) Annual cash flows          6,00,000          8,75,000          8,75,000          8,75,000          8,75,000 Net cash flow         (25,75,000)          6,00,000          8,75,000          8,75,000          8,75,000          8,75,000 Discount rate@ 16.40%                  1.0000             0.8591             0.7381             0.6341             0.5447             0.4680 Discounted cash flow (25,75,000.00)    5,15,463.92    6,45,806.02    5,54,816.17    4,76,646.20    4,09,489.86 NPV (total of discounted cash flow)            27,222.17

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