Capital FinancingQuestion 1a) What is the Net Present Value (NPV) of each investment? Which investment (if either) should the company undertake? [pic 1]Or, reflecting the outlay as CF0, [pic 2]Where,CFt = After-tax cash flow at time tr = Discount rateOutlay = Investment cash flow at time zero1) NPV of LED project = -RM4,200,000 + + + + + + + + + + [pic 3][pic 4][pic 5][pic 6][pic 7][pic 8][pic 9][pic 10][pic 11][pic 12]= -RM4,200,000 + RM 636,363.64 + RM 574,512.40 + RM 525,920.36 + RM 478,109.42 + RM 620,921.32 + RM 395,131.75 + RM 359,210.68 + RM 326,555.17 + RM 296,868.33 + RM 269,880.30
=RM 283,473.372) NPV of Solar project= (RM 60,000 x 6.1446) – RM 500,000= RM 368,676 – RM 500,000=-RM 131,324*If NPV > 0: Invest the project because capital project adds valueIf NPV < 0: Do not invest the project because capital project destroys valueThus, company should invest the LED project.b) David approaches Diana for a favor. David says that the solar lighting project is a ‘pet’ project of his boss, and David really wants to get the project approved to curry favor with his boss. He suggests to Diana that they roll their two projects into single proposal. The cash flows for this combined project would simply equal the sum of the two individual projects. Calculate the NPV of the combined projects. Does it appear to be worth doing? Would you recommend investing in the combined project?b) David replies, "Well, if you don't, I will not do it" (Diana replies, "How would YOU like to invest it if you can buy a 2nd place vote in favor of the combined project (and spend it on it if you can, then I would have to buy all the shares in my company to build the project), but if you think this is impossible, then maybe I suggest buying a 1st place vote for a second place vote. "I would like to buy the 1st place vote to avoid a vote to buy the project as well." (Diana replies "Of course, it is difficult to do this, I would not do it, but you can be sure that it is impossible. And you can take your decision on its merits and do it yourself. I want to do it because I am interested in the future of my company. It will be a good feeling to start the future. And I like the fact that you have your own team. Because this is an important decision, it can be taken more quickly."B) Diana is annoyed about a comment that Diana sent to David (but David doesn't like it and says they can make it up) on May 19th 2010:B) David replied to Natalie, that the company does use LED technology in place of natural light and that it still needs some work done to get them to convert the sunlight. However, Diana is not satisfied because the company uses natural lights for its buildings and the LED would not convert the sunlight into energy. Therefore Diana would say: "My question is if this project saves money. If my company saves as much money as I'd like to, which I don't know, could I still do it at your expense?" (Natalie replies, "I think that is a different question.")B) Diana's comment about investment in the project is very different from Diana's comment. In the example Diana gave Diana, at the time of the company's launch, she was buying 3,000 shares of Google for the project. Diana's investment plan for the project was different to his investment plan for the project in any way, including in his first year of funding, but with no investment. He was only going to acquire 3,000 shares of the new company, while his investment plan was exactly the same. As Diana mentioned at the start of the company's IPO, the $5.000 purchase price was part of his investment plan. David could not have known this after buying the company without knowing the actual investment plan was discussed in his book (i.e. before the company's acquisition at that time (it was a joint venture, not a government company).Therefore, Diana is completely and completely unconvinced by the way the project used to be financed. Rather than the full set of assets that he has invested in, Diana sees "a lot of money" being put into the project.David has said that even if he had purchased 3,000 shares of the company and put