3.

The Acme Blivet Company is evaluating three investment situations: (1) produce a new
line of aluminum blivets, (2) expand its existing blivet line to include several new sizes, Present Value of
Project Investment Required
and (3) develop a new, higher-quality line of blivet. If only the project in question is Future Cash Flows
undertaken, the expected present values and the amounts of investment required are as
follows: (See on the right). If projects 1 and 2 are jointly undertaken, there will be no economies; the investment
required and present values will simply be the sum of the parts. With projects 1 and 3, 1 200,000.00 290,000.00
economies are possible in investment because one of the machines acquired can be used in 2 115,000.00 185,000.00
both production processes. The total investment required for projects 1 and 3 combined is 3 270,000.00 400,000.00
$440,000. If projects 2 and 3 are undertaken, there are economies to be achieved in marketing
and producing the products but not in investment. The expected present value of
future cash flows for projects 2 and 3 combined is $620,000. If all three projects are undertaken
simultaneously, the economies noted above will still hold. However, a $125,000
extension on the plant will be necessary, as space is not available for all three projects.
Which project or projects should be chosen? If you need excelsheet modelling, please contact me at
rajib.dahal@gmail.com/rajib.dahal@nu.edu.kz
© Rajib Dahal
Option: 1-If projects 1 and 2 are jointly undertaken Option: 2-If projects 1 and 3 are jointly undertaken
Investment required 315,000.00 Investment required 440,000.00
Present value of future cashflows 475,000.00 Present value of future cashflows 690,000.00
NPV 160,000.00 NPV 250,000.00

Option: 3-If projects 2 and 3 are jointly undertaken Option: 4-If all the projects 1, 2 and 3 are undertaken simultaneously
Investment required 385,000.00 Investment required 680,000.00
Present value of future cashflows 620,000.00 Present value of future cashflows 910,000.00
NPV 235,000.00 NPV 230,000.00

So, Projects 1 and 3 (Option:-2) should be chosen because they provide the highest net present value.