Question
Sefalana (Pty) Ltd is evaluating two projects that have an expected life of five years and an initial investment outlay of P1 million. Below are
Sefalana (Pty) Ltd is evaluating two projects that have an expected life of five years and an initial investment outlay of P1 million. Below are the estimated net cash inflows for each project:
| Year | Cash flows - Project A (Pula) | Cash flows -Project B (Pula) |
| 1 | 300,000 | 400,000 |
| 2 | 320,000 | 400,000 |
| 3 | 370,000 | 400,000 |
| 4 | 430,000 | 400,000 |
| 5 | 550,000 | 400,000 |
The cost of capital for both projects is 10 per cent.
Required:
Advise management on the project that they can invest in based on the following:
Net Present Value (NPV).
Sefalana (Pty) Ltd is evaluating two projects that have an expected life of five years and an initial investment outlay of P1 million. Below are the estimated net cash inflows for each project:
| Year | Cash flows - Project A (Pula) | Cash flows -Project B (Pula) |
| 1 | 300,000 | 400,000 |
| 2 | 320,000 | 400,000 |
| 3 | 370,000 | 400,000 |
| 4 | 430,000 | 400,000 |
| 5 | 550,000 | 400,000 |
The cost of capital for both projects is 10 per cent.
Required:
Advise management on the project that they can invest in based on the following:
a. Net Present Value (NPV).
b. Internal Rate of Return (IRR). (10 marks)
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