Magma Ltd. wishes to make a choice between two mutually exclusive projects. Each of these projects...
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Magma Ltd. wishes to make a choice between two mutually exclusive projects. Each of these projects requires Sh.400, 000 in initial cash outlay. The details of the two projects are as follows: Project A This project is made up of two sub-projects. The first sub-project will require an initial outlay of Sh.100, 000 and will generate Sh.25, 600 per annum in perpetuity. The second sub-project will require an initial outlay of Sh.300, 000 and will generate Sh.85,200 per annum for the 8 years of its useful life. This sub-project does not have a residual value at the end of the 8 years. Both sub-projects are to commence immediately. Project B This project will generate Sh.87, 000 per annum in perpetuity. The company has a cost of capital of 16%. Required: (1) (ii) (iii) choice. Determine the net present value (NPV) of each project. Compute the internal rate of return (IRR) for each project. Advise Magma Ltd. on which project to invest in, and justify your QUESTION: Projects A and B are mutually exclusive and have the following characteristics: Project Initial cash outlay Economic life A 1,000,000 3 years 500,000 Annual cash flows Cost of capital 10% Compute the NPV and IRR of the two projects and rank them. B 1,000,000 6 years 300,000 10% Magma Ltd. wishes to make a choice between two mutually exclusive projects. Each of these projects requires Sh.400, 000 in initial cash outlay. The details of the two projects are as follows: Project A This project is made up of two sub-projects. The first sub-project will require an initial outlay of Sh.100, 000 and will generate Sh.25, 600 per annum in perpetuity. The second sub-project will require an initial outlay of Sh.300, 000 and will generate Sh.85,200 per annum for the 8 years of its useful life. This sub-project does not have a residual value at the end of the 8 years. Both sub-projects are to commence immediately. Project B This project will generate Sh.87, 000 per annum in perpetuity. The company has a cost of capital of 16%. Required: (1) (ii) (iii) choice. Determine the net present value (NPV) of each project. Compute the internal rate of return (IRR) for each project. Advise Magma Ltd. on which project to invest in, and justify your QUESTION: Projects A and B are mutually exclusive and have the following characteristics: Project Initial cash outlay Economic life A 1,000,000 3 years 500,000 Annual cash flows Cost of capital 10% Compute the NPV and IRR of the two projects and rank them. B 1,000,000 6 years 300,000 10%
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Step 1 iFirst we evaluate projects to calculate their NPV For Project A we have two sub projects as we name then sub project I and sub project II Sub project I present value of perpetuity is cashflow ... View the full answer
Related Book For
Fundamentals Of Financial Management
ISBN: 9780273713630
13th Revised Edition
Authors: James Van Horne, John Wachowicz
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