Question
The following two projects of equal risk are mutually exclusive alternatives for expanding the firms capacity. The firms cost of capital is 15%. The cash
The following two projects of equal risk are mutually exclusive alternatives for expanding the firms capacity. The firms cost of capital is 15%. The cash flows for each project are given in the following table.
Year Project A Project B
0 210,000 20,000
1 15,000 12,000
2 30,000 10,500
3 32,000 9,500
4 425,000 8,200
Required:
a) Calculate each projects payback period. Using the payback period criterion which project is preferable? (2 marks) b) Calculate the net present value for each project. Using the net present value criterion, which project is preferable? (4 marks) ) Calculate the internal rate of return for each project. Using the internal rate of return criterion, which project is preferable? (4 marks) (Calculate to the nearest percentage). d) Calculate the profitability index. Using the profitability index criterion which project is acceptable? (2 marks) e) Discuss any conflict in ranking that may exist between the four methods used and why the NPV is the best method. (3 marks)
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