You have been asked by PMC Ltd to analyze two projects, X and Y. Each project costs one million pounds sterling, and the company’s cost of capital is ten percent per annum. The expected net cash flows are as follows:

Year Project X Project Y

1 £600,000 £200,000

2 £500,000 £300,000

3 £300,000 £400,000

4 £100,000 £675,000

a) Calculate the following for each project:

i) net present value

ii) modified internal rate of return

iii) discounted payback period

b) Which project(s) should be accepted if they are independent? Explain why.

c) How might a change in the cost of capital produce a conflict between the net present value and internal rate of return rankings of these two projects? Would this conflict exist if the cost of capital were changed? Why does the conflict exist? Discuss critically.

Answer rating: 100% (QA)

Project Analysis for PMC Ltd a Calculations for Each Project i Net Present Value NPV Project X Present value of Year 1 cash flow 600000 1 01 545455 Present value of Year 2 cash flow 500000 1 012 39247... View the full answer