Question
Magic Media Ltd is considering two mutually exclusive projects. Project A costs R50m and will generate a net cash flow of R20m per year for
Magic Media Ltd is considering two mutually exclusive projects. Project A costs R50m and will generate a net cash flow of R20m per year for four years. Projects B cost R68m and will generate a net cash flow of R27m per year for four years. The market value of either project at the end of four years is expected to be 30% of the cost. The depreciation deduction is 20% per year on a straight-line basis. The cost of capital is 11% and the corporate tax is 28%
Determine incremental cash flows for both projects?
Using NPV, IRR and Payback period, indicate which project should be selected by Magic Media.?
Explain why the NPV and IRR techniques are preferred over the other capital budgeting techniques.?
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