Thomas Company is considering two mutually exclusive projects. The firm, which has a 12%

cost of capital has estimated its cash flows as shown in the following table.

Project A Project B

Initial investments (RM130,000) (RM85,000)

Year: Cash Inflows

1 RM25,000 RM40,000

2 35,000 35,000

3 45,000 30,000

4 50,000 10,000

5 55,000 5,000

Required:

a. Calculate the Net Present Value (NPV) of each project and assess its acceptability.

b. Calculate the Internal Rate of Return (IRR) for each project, and assess its acceptability.

c. Draw the NPV profiles for both projects on the same set of axes.

d. Evaluate and discuss the rankings of the two projects on the basis of your findings in part

a, b and c.

e. Explain your findings in part d in light of the pattern of cash inflows associated with each

project.