Year Project A Project B 0 R -10 000 R -10 000 1 6 500 3 500
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Question:
Year Project A Project B
0 R -10 000 R -10 000
1 6 500 3 500
2 3 000 3 500
3 3 000 3 500
4 1 000 3 500
NB: Each project has a cost of R10 000, and the cost of capital for each is 12 percent
1. Calculate each project's payback period, net present value (NPV), internal rate of return (IRR), and profitability index (PI).
2. Which project or projects should be accepted if they are independent?
3. Which project should be accepted if they are mutually exclusive?
4. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5 percent? (Hint: Plot the NPV profiles.)
5. Why does the conflict exist?
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