3. A company is considering to select a project out of the two mutually exclusiv
ID: 2664939 • Letter: 3
Question
3. A company is considering to select a project out of the two mutually exclusive projects. The Company’s cost of capital is 10% and the net after tax cash flow of ht project are as follows.:Year 0 1 2 3 4 5
Project X (Rs.) 2,00,000 35,000 80,000 90,000 75,000 20,000
Project Y (Rs.) 2,00,000 2,18,000 10,000 10,000 4,000 3,000
(i) Calculate the NPV and IRR of each project.
(ii) State, with reasons, which project you would recommended.
The discount factors are as follows:
Year 0 1 2 3 4 5
Discount Factor
At 10% 1 0.91 0.83 0.75 0.68 0.62
At 20% 1 0.83 0.69 0.58 0.48 0.41
Explanation / Answer
Project A should be selected because NPV of project is higher than Project B.
Project B should be selected because IRR of project is higher than Project A.
Project A Project B Year Cash Flow PVF at 10% PV of Cash Flow Cash Flow PV of Cash Flow 0 Rs. -2,00,000.00 1 Rs. -2,00,000.00 Rs. -2,00,000.00 Rs. -2,00,000.00 1 Rs. 35,000.00 0.91 Rs. 31,818.18 Rs. 2,18,000.00 Rs. 1,98,181.82 2 Rs. 80,000.00 0.83 Rs. 66,115.70 Rs. 10,000.00 Rs. 8,264.46 3 Rs. 90,000.00 0.75 Rs. 67,618.33 Rs. 10,000.00 Rs. 7,513.15 4 Rs. 75,000.00 0.68 Rs. 51,226.01 Rs. 4,000.00 Rs. 2,732.05 5 Rs. 20,000.00 0.62 Rs. 12,418.43 Rs. 3,000.00 Rs. 1,862.76 NPV Rs. 29,196.65 Rs. 18,554.25 IRR 16% 19%Related Questions
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