Magma Ltd. wishes to make a choice between two mutually exclusive projects. Each of these projects requires Sh.40,000,000 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.10,000,000 and will generate Sh.2,560,000 per annum in 5 years. The second sub-project will require an initial outlay of Sh.30,000,000 and will generate Sh.8,520,000 per annum for the 5 years of its useful life. This sub-project does not have a residual value at the end of the 5 years. Both sub-projects are to commence immediately.

Project B This project will generate Sh.8,700,000 per annum for the next five years.

-Both projects will be depreciated on straight line method.

-The company has a cost of capital of 16%.

Required:

a) Show the Net cashflows of each project

b) What will be the net present value (NPV) of each project?

c) In terms of accounting rate of return, which project can you recommend