Question $2(25$ marks$)$

Consider the following information about four different projects. Each requires an initial outlay of Rs$2,000,000$ but the firm only has funds to undertake one project. The firm has traditionally used a discount rate of $10\%$ to evaluate all its projects. The information regarding projects A$,$ B$,$ C and D are as follows:

Project A Project B Project C Project D

Cash flows Rs$000$ Rs$000$ Rs$000$ Rs$000$

Year

$11601,200-350$

$2200900-60$

$335030060$

$439590350$

$543270700$

$64401,200$

$74422,250$

$8444$

$9446$

$10448$

$11450$

$12451$

$13451$

$14452$

$1510,000-2,000$

Performance indicators: Project A Project B Project C Project D

NPV RS$000393\mathrm{.}92228\mathrm{.}22165\mathrm{.}04182\mathrm{.}98$

IRR $(\%)11\mathrm{.}30\%12\mathrm{.}30\%15\mathrm{.}30\%11\mathrm{.}40\%$

Payback period $($years$)14\mathrm{.}26\mathrm{.}051\mathrm{.}896\mathrm{.}04$

Required:

Explain, with supporting reasons, which project the firm should opt for. Your answer should include an evaluation of each of the four projects. Note, although all computations are accurate you may put into question the basis or methodology used by the firm to evaluate projects.

$(25$ marks$)$