QUESTION 1 20 Marks (36 minutes) A company is considering which of two mutually exclusive projects it should undertake. The finance director thinks that the project with the higher (Net present Value) NPV should be chosen whereas the managing director thinks that the one with higher Internal Rate of Return (IRR) should be undertaken especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10% and the net after tax cash flows of the projects are as follows. Project X Project Y Year 0 1 2 3 4 5 -200 000 35 000 80 000 90 000 75 000 20 000 -200 000 218 000 10 000 10 000 4 000 3 000 REQUIRED Marks (a) Explain the uses, limitations and merits of the NPV and IRR methods of investment appraisal. 10 (b) Calculate the NPV and IRR of each project. 6 Recommend, with reasons, which project you would undertake (if any) 2 (d) Explain the inconsistency in ranking of the two projects in view of the remarks of the directors. 2. TOTAL MARKS 20