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1) Using Net Present Value (NPV), evaluate the two alternatives available to Leo Company.

(10 marks)

2) If you are the manager of the project team, which project would you recommend and why?

(03 marks)

3) Suppose the economic conditions after the first year are expected to remain the same for the foreseeable future. In such case, discuss the best course of action for Leo Company.

(12 marks)

Leo Company is evaluating two projects Project A and Project B as part of its ten-year strategic plan and intend to invest in only one project. Both projects are expected to have a useful life of three years with no residual values. The company's historical Return on Capital Employed (ROCE) is at 8% and the project team assumes it is viable to discount the future cash flows using same rate as the ROCE. Project A 10,000 Initial investment Project B 9,000 The project team has also put together the probabilities as to whether the economic conditions will be good or bad for the next three years. The expected cash flows for the projects along with the probabilities are given below; Year Economic condition Project A Probability Expected cash flows 1 Good 3,250 0.7 0.3 Bad Project B Probability Expected cash flows 0.7 3,500 0.3 2,500 0.6 5,000 0.4 4,000 0.8 4,500 0.2 3,700 2 Good 0.6 Bad 2,500 4,400 3,100 4,000 2,000 0.4 0.8 3 Good Bad 0.2 Required: 1) Using Net Present Value (NPV), evaluate the two alternatives available to Leo Company. (10 marks) 2) If you are the manager of the project team, which project would you recommend and why? (03 marks) 3) Suppose the economic conditions after the first year are expected to remain the same for the foreseeable future. In such case, discuss the best course of action for Leo Company. (12 marks)

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