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STU Plc is evaluating two potential projects, Project X and Project Y, both requiring an initial investment of USD 600,000. The expected cash flows and
STU Plc is evaluating two potential projects, Project X and Project Y, both requiring an initial investment of USD 600,000. The expected cash flows and profits for each project are as follows:
Project X:
- Year 1: Cash Flow - $100,000, Profit - $10,000
- Year 2: Cash Flow - $150,000, Profit - $20,000
- Year 3: Cash Flow - $200,000, Profit - $30,000
- Year 4: Cash Flow - $250,000, Profit - $40,000
- Year 5: Cash Flow - $300,000, Profit - $50,000
Project Y:
- Year 1: Cash Flow - $120,000, Profit - $15,000
- Year 2: Cash Flow - $170,000, Profit - $25,000
- Year 3: Cash Flow - $220,000, Profit - $35,000
- Year 4: Cash Flow - $270,000, Profit - $45,000
- Year 5: Cash Flow - $320,000, Profit - $55,000
- Cost of Capital: 12%
Tasks: a) Explain the relevant costs in investment decisions. b) Contrast between payback period and internal rate of return (IRR). c) Calculate for both projects: i) The payback period. ii) The net present value (NPV). iii) Recommend which project STU Plc should undertake, with justification.
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