Capital budgeting [5 marks]

1. Mrs Alis is an intelligent business woman. She makes her investments after a very thoughtful process. In January 2018 , her manager has shown her some projects with the following details

Option A

Investment into a towel business that initially cost $200,000 and then will generate cash inflow of $24000 per year for the next 10 years

Option B

Investment into a detergent business that initially cost $190,000 and then will generate cash inflow of $20,000 for each of next 12 years.

The rate of return associated with both the investments is 12%.

1. Calculate net present value (NPV) and internal rate of return (IRR) of both the investments.

[3 marks]

2. Comment on which investment Mrs Alis should pick on the basis NPV and IRR.

[2 marks]