MGT252. Project Finance and Budgeting
Assignment 3
You have been hired as a project management consultant to assist the Acme Company in evaluating two different project proposals they are considering.  Proposal A calls for the construction of a new plant which will require three years to complete and will have much greater capacity than the old plant.  Because the plant will have to be built on the current site, the old plant will have to be razed.  Proposal B involves the renovation of this plant.  This renovation will require two years to complete, but the plant can remain in operation in a reduced capacity during this upgrade.  Once the renovation is complete revenue will be increased by 25% per year, however annual maintenance will be 50% higher than Proposal A.

Proposal A: Build New Plant

	Year1	Year2	Year3	Year4	Year5	Year6	Year7	Year8	Year9	Year10
Revenue	  0	  0	   0	400	800	800	800	800	800	800
Expense	 800	 600	 600	50	50	50	50	50	50	  50

Proposal B: Renovate Existing Plant

	Year1	Year2	Year3	Year4	Year5	Year6	Year7	Year8	Year9	Year10
Revenue	  100	 100	350	350	350	350	350	350	350	350
Expense	  500	 500	75	75	75	75	75	75	75	75

Questions: 
a.	What is the profit associated with the project carried out in Proposal A? Proposal B?
b.	When does payback occur on the project carried out in Proposal A? Proposal B?
c.	What is the present value of revenue for the project carried out in Proposal A? Proposal B? (In computing present value, do not discount the value for the first year being examined.) (Assume i = 0.10)
d.	What is the present value of expense for the project carried out in Proposal A? Proposal B? (In computing present value, do not discount the value for the first year being examined.) (Assume i = 0.10)
e.	What is net present value for the project described in Proposal A? Proposal B? (In computing present value, do not discount the value for the first year being examined.) (Assume i = 0.10)
f.	What is the internal rate of return for the project described in Proposal A? Proposal B?
g.	Which project would you recommend?  Why?  What are the merits?  What are the risks?