A firm plans to expand its existing business and, thus, invest in a new project. The Initial
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Question:
A firm plans to expand its existing business and, thus, invest in a new project. The “Initial Cost” on and the expected future “Net Cash Flows” from Project X and Project Y are given in the table below.
| Item | Project X | Project Y |
| Initial Cost | 20000 | 20000 |
| Net Cash Flows | ||
| Year 1 | 1000 | -2000 |
| Year 2 | 3000 | 4000 |
| Year 3 | 8000 | 10000 |
| Year 4 | 12000 | 14000 |
| Year 5 | 16000 | 20000 |
1.Use the Net Present value (NPV) method to determine which of the two projects the firm should choose to invest in if the discount rate is 4.5% per annum. State your reason/s.
2.After the first year of the project, if the discount rate has increased to 5% per annum, calculate the new NPV for the two projects.
3.Find the IRR for project X and Y, which project would you choose to invest in? State the reason/s for your decision.
Expert Answer:
The firm should choose Project Y because is has a higher NPV than Project X Thus 22 ... View the full answer
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