Oman Investment Company is a reputed company operating on several projects across the country. The management of the Company is currently reviewing the Company’s investment alternatives for the coming year and are considering four projects in which the Company can choose only one project.
Project (A) would involve an investment outlay of OMR 30,000 now and a further investment outlay of OMR 20,000 after two years. Cash flows of the project would be as follows: 2nd year OMR 15,000; and 3rd year OMR 12,000. The project is associated with OMR 10,000 as overhead cost at the end of the period, yet the auditor stated that this amount is not related to the capital expenditure of the project.
Project (B) is another long-term project, involving an immediate outlay of OMR 22,000 and annual cash flows as follows: 1st to 3rd years OMR 6,000 and 4th year OMR3,000. There is no salvage value for this project. An additional working capital of OMR 5000 is required in the 4th year.
Project (C) would cost OMR 39,000 now, and would earn the following cash flows: 1st year OMR 9,000; 2nd year OMR 12,000; 3rd year OMR 20,000; 4th year OMR 25,000; and 5th year OMR 30,000. Another capital equipment purchased at the 2nd year of the project by ROM 6,000 that could be resold for OMR 4,000 at the end of the project. In addition, this projected need to be financed by lending at cost of ROM 5000 as cost of capital. Besides, there were OMR 2,000 as cost for marking research before initiating the project.
Project (D) would require a current outlay of OMR 54,000 on capital equipment and OMR 22,000 on transportation costs. The profits (in OMR) from the project would be OMR18,000 for four year and OMR 20,000 as net loss for the 5th year. The equipment is depreciated at rate of 25% based on straight line method.
The minimum rate of return expected by the Company from projects of four years duration is 12%, and for all other projects is 15%.
Based on the above details, total relevant cash out flow after tax for project (C) is:
a. OMR 11,000
b . OMR 50,000
c. OMR 6,000
d. OMR 52,000
