A company is considering which of two mutually exclusive projectsit should undertake. The finance director thinks...

 

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A company is considering which of two mutually exclusive projectsit should undertake. The finance director thinks that the project withthe higher NPV should be chosen, whereas the managing director thinksthat the one with the higher IRR should be undertaken, especially asboth projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10%, and the net after tax cashflows of the projects are as follows: Year 0 1 2 3 4 5 Project X $000 (200) 35 80 90 75 20 Project Y $000 (200) 218 10 10 4 3 Required: (a) Calculate the NPV and IRR of each project. (6 marks) (b) Recommend, with reasons, which project you would undertake (if either). (4 marks) (c) Briefly explain the inconsistency in ranking of the two projects in view of the remarks of the directors. (2 marks) (d) Discuss the advantages and disadvantages of the payback and accounting rate of return methods ofinvestment appraisal. Note: you are not required to perform anycalculations for these two methods; if you do, you will not score anymarks for it. A company is considering which of two mutually exclusive projectsit should undertake. The finance director thinks that the project withthe higher NPV should be chosen, whereas the managing director thinksthat the one with the higher IRR should be undertaken, especially asboth projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10%, and the net after tax cashflows of the projects are as follows: Year 0 1 2 3 4 5 Project X $000 (200) 35 80 90 75 20 Project Y $000 (200) 218 10 10 4 3 Required: (a) Calculate the NPV and IRR of each project. (6 marks) (b) Recommend, with reasons, which project you would undertake (if either). (4 marks) (c) Briefly explain the inconsistency in ranking of the two projects in view of the remarks of the directors. (2 marks) (d) Discuss the advantages and disadvantages of the payback and accounting rate of return methods ofinvestment appraisal. Note: you are not required to perform anycalculations for these two methods; if you do, you will not score anymarks for it.

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A NPV IRR of the Projects are calculated below PROJECT X pvif pvif year PROJECT Y 0 1 2 3 4 year 5 N... View the full answer