Question
Akani Construction is considering two mutually exclusive projects, each with an initial investment of R150,000. The companys directors have set a maximum 4-year payback requirement,
Akani Construction is considering two mutually exclusive projects, each with an initial investment of R150,000. The companys directors have set a maximum 4-year payback requirement, as well as a 9% cost of capital. The cash inflows associated with the two projects are shown below. Year Cashflows Project A Cashflows Project B 1 R45,000 R75,000 2 R45,000 R60,000 3 R45,000 R30,000 4 R45,000 R30,000 5 R45,000 R30,000 6 R45,000 R30,000 You are required to: a) Calculate the payback period for each project. (2) b) Calculate the NPV for each project at 0%. (4) c) Calculate the NPV for each project at 9%. (6) d) Derive the IRR of each project. (6) e) Rank the projects by each of the techniques used. Which of the two projects should be pursued? Justify your recommendation. (8) f) Suppose the cost of capital rises to 12%, calculate the new NPV and make a recommendation as to which project should be considered.
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