ZOOM Transport Inc. wishes to invest in one of three transport infrastructure projects X, Y and Z with initial outlays of $780 million, $475 million and $300 million respectively. Projects are expected to produce each year free after-tax cash flows of $280 million for project X, project Y is expected to generate $150 million and project Z $210 million. Each project has depreciable lives of 12 years. The required rate of return is 14%.
(i) Use the Net Present Value Technique and determine the most appropriate investment for Delta Corporation. Justify your response. (ii) State two benefits and two disadvantages of using the NPV. (iii) Though the payback method for evaluating capital investments has some serious flaws, it is popular in business practice, showing up on most financial evaluation software packages. Outline three reasons why the payback method is popular in business? (iv) Why would a manager not accept a project that has a positive net present value? (v) What decision criterion would you recommend for:
a. Mutually Exclusive Projects and b. Projects being evaluated under capital constraints.