Advanced: Calculation of NPV and IRA, a discussion of the inconsistency In ranking and a calculation of the cost of capital at which the ranking changes A company is considering which of two mutually exclusive projects it should undertake. The finance director thinks that the project with the higher NPV should be chosen whereas the managing director thinks that the one with the higher IRA should be undertaken especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 1 0% and the net after tax cash flows of the projects are as follows:

You are required to:

(a) calculate the NPV and IRA of each project; (6 marks)

(b) recommend, with reasons, which project you would undertake (if either),

(c) explain the inconsistency in ranking of the two projects in view of the remarks of the directors; (4 marks)

(d) identify the cost of capitai at which your recommendation in

(b) would be reversed

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Project X Project Y (000) Year 0 -200 (000) -200 1 35 218 2 3 4 5 0 90 75 20 80 10 10 4 3