Question
The company you work for is currently considering the following projects for investment purposes: Project 1 Project 2 Initial cost $500,000 $700,000 Expected cash flow
The company you work for is currently considering the following projects for investment purposes:
|
| Project 1 | Project 2 |
| Initial cost | $500,000 | $700,000 |
| Expected cash flow to the firm | $160,000 | $250,000 |
| Life of the projects (years) | 5 | 4 |
The company has a cost of capital of 12%. The projects are mutually exclusive due to capital rationing.
Note: The cash flows to the firm are after tax and depreciation.
- Based on the above information, identify, using calculations, which project should be chosen? (8 marks)
- What are some of the advantages associated with the use of the NPV in analysing projects? (3 marks)
- Calculate the Internal Rate of Return (IRR) and payback period for both projects. (4 marks)
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Handbook Of Income Distribution Volume 2B
Authors: Anthony B. Atkinson, Francois Bourguignon
1st Edition
0444594299, 978-0444594297
