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Q No. 3:M/s Sons & Sons is considering two projects, A & B, with cash flows as shown below: period Cash Flow of Project A

Q No. 3:M/s Sons & Sons is considering two projects, A & B, with cash flows as shown below:

period

Cash Flow of

Project A

Project B

0

-90,000

-150,000

1

30,000

72,000

2

30,000

35,000

3

30,000

40,000

4

30,000

25,000

a. Calculate discounted payback period, net present value and internal rate of return for each project using opportunity cost of capital 13 % & 9% for project A & B respectively. (2Marks)

b. Which project(s) should be accepted if : (5 Marks)

(i) The projects are mutually exclusive and there is no capital constraint.

(ii) The projects are independent and there is no capital constraint.

(iii) The projects are independent and there is a total of $100,000 of financing for capital outlays in the coming period.

c. Why the cost of capital for A might be higher than for B. State possible reason(s) (2 Marks)

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