- 10 Marks
Question
Omidan Local Government Council has N20,000,000 to invest, if there is an assurance that the investment will earn at least 12% p.a. In view of this, the following projects are being considered:
- Project A will earn N21,800,000 at the end of year one with a residual value of N1,500,000;
- Project B will earn N24,000,000 at the end of year two with a residual value of N500,000; and
- Project C will earn N14,000,000 at the end of year one and another N10,000,000 at the end of year two with no residual value.
If none of the projects is undertaken, Omidan Local Government Council will invest the N20,000,000 in a risk-free security that will earn interest of 12% p.a.
Required:
Assess and advise Omidan Local Government Council on which of the projects to be undertaken using Net Present Value (NPV) method.
Answer
b. Calculation of Net Present Value (NPV)
- NPV for Project A: N804,570 (Positive, suggesting profitability above the required 12% return)
- NPV for Project B: -N468,600 (Negative, indicating it does not meet the 12% requirement)
- NPV for Project C: N472,600 (Positive, indicating profitability above the required return)
Conclusion: Project A, with an NPV of N804,570, is recommended as it has the highest positive NPV, providing the best financial return among the options. Investing in the 12% risk-free security is unnecessary since Projects A and C both exceed this return
- Topic: Government Revenue
- Series: MAY 2021
- Uploader: Kwame Aikins