Your superior has just handed you the estimate cash flows for two proposed projects. Project X would take some time to build up the market and its cash flow would increase over time. Project Y on the other hand, would experience a decrease in cash flow over time. Both project have three years lives. here are the project net cash flows (in thousands of Ghana Cedis).

                            Year                                       Project X                           Project Y

                               0                                          (1000)                              (1000)

                               1                                             100                                   700

                               2                                             600                                   500

                               3                                             800                                   200

Depreciation, salvages value and net working capital requirement, and tax effect are included in these cash flows. Both projects have risk characteristics that are similar to firm's average project. Your company's WACCis 10%. You must determine whether one or both projects should be accepted.

a) Differentiate between mutually exclusive projects independent projects

b) what is the payback period and what is its rationale? Find the pay back for  project X and Y?

c) If the company's maximum acceptable pay back is 2 years, indicate which of the project should be accepted if (1) they are mutually exclusive and (2) independent?

d) what is the rationale behind the NPV method? Based on the NPV method, what project or projects should be accepted if they are: (1) independent and (2) mutually exclusive?

Answer rating: 100% (QA)

a Mutually exclusive projects are projects which cannot be carried out simultaneously the acceptance of one project affects the acceptance of the othe... View the full answer