Question 4

You need to consider two projects which have the following cash flows:

Project A requires an initial investment of $10,000 and will generate net cash flows of $5,000 at the end of year 1, $6,000 at the end of year 2, $7,000 at the end of year 3, and $8,000 at the end of year 4.At the end of year 2, maintenance costs of $8,000 will have to be disbursed.

Project B requires an initial investment of $15,500 and will generate starting at the end of each following year, net cash flows of $6,000 per year for 6 years.It will incur maintenance costs of $8,000 at the end of year 3.

Assume that the required return is 12% per annum for both projects.

i.(5 marks)

Draw timeline showing the cash flows of projects A and B?

ii.(6 marks)

Find the NPV of projects A and B?

iii.(8 marks)

Which project should be chosen if Projects A and B are mutually exclusive? Explain.

iv.(3 marks)

Which project should be chosen if the Projects A and B are completely independent?Explain.

v.(3 marks)

Based on the cash flows of project A, explain why IRR is not an appropriate evaluation technique for this project?