Question-2

The following information about two mutually exclusive projects H and K are relevant for requirements (a) to (c) only. W-Max Company is considering investing in project H, which will require an outlay of $500 million. The project will have a four-year life and at the end of that time, the equipment will be scrapped.

The project is expected to generate the following annual cash flows:

	Year-1	Year-2	Year-3	Year-4
Cash inflows	$540m	$440m	$460m	$400m
Cash outflows	$315m	$245m	$265m	$250m

The company has a required rate of return of 9.40%. The company normally has two-year payback criteria. The applicable tax rate is 30%.

The alternative project K offers the following net cash flows:

Year-0 ($500m); Year-1 $125m; Year-2 $175m; Year-3 $236m and Year-4 $279m.

(a) Calculate the (i) NPV, (ii) IRR, (iii) PVI, (iv) Payback period, (v) Discounted payback period for projects H and K.

(b) Calculate the crossover rate (between projects H and K) based on the cash flow data mentioned above. Show the range of required rates for which either project H or project K would be preferred.

(c) Based on your findings in requirements a and b above, what would be the decision of selection of project (when the required rate of return is 9.40 percent)?

Answer by using financial calculator formula