Question
A company is considering investing in two projects, Project X and Project Y. The cashflows associated with the projects are as follows; Project X: Initial
A company is considering investing in two projects, Project X and Project Y. The cashflows associated with the projects are as follows;
Project X:
Initial outgo: $150,000
Income: $201,000 at the end of year 5.
Project Y:
Initial outgo: $120,000
Income: $162,250 at the end of year 2.
Assume that the interest rate for lending and borrowing is 6.5% pa.
(a) What are the net present values (at time 0) for Project X and for Project Y?
(b) What are the internal rates or return for Project X and Project Y?
(c) Based on net present value, which project is the preferred investment at the assumed interest rate?
(d) What range of interest rates, i, covers all of the possible values for which Project X will have a higher net present value than Project Y?
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