Advanced: Calculation of NPV and IRR, 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 IRR should be undertaken especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10% and the net after tax cash flows of the projects are as follows:

You are required to:

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

(b) recommend, with reasons, which project you would undertake (if either); (4 marks)

(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 capital at which your recommendation in

(b) would be reversed.
(6 marks) (Total 20 marks) CIMA Stage 3 Management Accounting Techniques

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Project Project Y X (000) (000) Year 0 -200 -200 1 . 35 218 2 80 10 3 90 10 25 45 75 4 20 3