Question: ABC Ltd. is considering two mutually exclusive projects. Both require an initial cash outlay of 20,000 for machinery and have a life of 4 years.
ABC Ltd. is considering two mutually exclusive projects. Both require an initial cash outlay of ₹20,000 for machinery and have a life of 4 years. The company’s required rate of return is 12% and it pays tax at 40%. The projects will be depreciated on a straight-line basis. The net cash flows (before taxes) expected to be generated by the projects and the present value (PV) factor (at 12%) are as follows:
Year | 1 | 2 | 3 | 4 |
Project 1 | 8,000 | 8,000 | 8,000 | 8,000 |
Project 2 | 10,000 | 6,000 | 5,000 | 7,000 |
PV factor | 0.893 | 0.797 | 0.712 | 0.636 |
You are required to:
- Compute NPV of each project.
- Determine which project is more feasible.
Step by Step Solution
There are 3 Steps involved in it
1 Expert Approved Answer
Step: 1 Unlock
Question Has Been Solved by an Expert!
Get step-by-step solutions from verified subject matter experts
Step: 2 Unlock
Step: 3 Unlock
Study Help