Question 3

(A) A company is selling a piece of property and an entrepreneur is offering three alternative methods of payment;

A single payment now at GHS270 million

Three payment; GHS180 million now, GHS90 million in a years time and GHS30 million in two year's time.

An annuity payment of GHS60 million, payable at the end of the each of the next six years.

Required

Using a discount rate of 20%, advise the entrepreneur on the most economical method of payment.

(B) A company is considering two alternative investment projects both of which have a positive net present value. The projects have been ranked on the basis of both net present value (NPV) and internal rate of return (IRR). The result of the ranking is shown below:

Project A Project B

NPV 1st 2nd

IRR 2nd 1st

Discuss potential reasons why the conflict between the NPV and IRR

ranking may have arisen.