Question-2

The following information about two mutually exclusive projects H and K are relevant for requirements (a) to (c) only. W-Max Company is considering investing in project-H, which will require an outlay of $500 million. The project will have a four-year life and at the end of that time, the equipment will be scrapped.

The project is expected to generate the following annual cash flows:

	Year-1	Year-2	Year-3	Year-4
Cash inflows	$540m	$440m	$460m	$400m
Cash outflows	$315m	$245m	$265m	$250m

The company has a required rate of return of 10.38%. The company normally has two-year payback criteria. The applicable tax rate is 30%.

The alternative project-K offers the following net cash flows:

Year-0 ($600m); Year-1 $124m; Year-2 $176m; Year-3 $239m and Year-4 $280m.

Calculate the NPV, IRR, PVI, Payback period and Discounted payback period for projects H and K. Once completed you need to then find the crossover rate between project H & K based on cash flow data above. You need to provide the range of required rates for which either project H or project K would be preferred. Once you have found the required rates, what project would you select given the required rate of return is 10.37%?

You may use excel. Show workings or simply state variables used in your calculation.