Project Evaluation Criteria

Addis Ababa University

college of business and economics

PROJECT MANAGEMENT AND ANALYSIS

[PROJECT ASSIGNMENT ON DISCOUNTING AND ALTERNATIVE INVESTMENT CRITERIA]

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1. Answer for question 1.

Alternative A: Glass Bottle Unit

|Year |Inflow |Outflow |NCF |

Alternative B: A new unit

|Year |inflow |outflow |NCF |

Decision: If Ms. Hadash evaluate the projects using the 8% discount rate, she would choose Alternative B which is to set up a new plant in order to recover her capital investment and also to receive a rate of return on capital higher than the discount rate than alternative A. But If Ms. Hadash evaluate the projects using the 10% discount rate, she would choose Alternative A which is to modify existing Glass bottle plant because Alternative B will not allow her to earn a rate of return equal to the discount rate, nor can she recover her invested capital, and hence, her real net worth is expected to decrease.

2. Answer for question 2

Alternative A: Glass Bottle Unit

|Year |Inflow |Outflow |NCF |FvF@8% |Fv@8% |
|0 |0 |103 |-103 |2.52 |-259.37 |
|1 |0 |80 |-80 |2.33 |-186.53 |
|2 |63 |32.5 |30.5 |2.16 |65.85 |
|3 |68 |37 |31 |2.00 |61.97 |
|4 |72 |42 |30 |1.85 |55.53 |
|5 |75 |45 |30