1.Ahmed is considering two independent projects with the following cash flows. T
ID: 2769917 • Letter: 1
Question
1.Ahmed is considering two independent projects with the following cash flows. The required return for both projects is 12%. Given this information, which one of the following statements is correct?
Year project A project B
0 -950,000 -125,000
1 370,000 65,000
2 400,000 55,000
3 450,000 50,000
a. Which project should be accepted on the basis of IRR?
b. Which project should be accepted on the basis of NPV?
c. Which project should be accepted on the basis of PI? projected cash flow analysis.
d. Which project should be accepted on the basis of payback period? Management’s target payback period is 2.5 years.
e. Which is the best project according to you and why? At what cost of capital the conflict between NPV and IRR will disappear? Justify on the basis of incremental cash flow analysis.
Explanation / Answer
a )IRR can be found by hit and trial method
It is the rate of return at which the NOV becomes zero
Here project B is better
B) we have to find the NPV of the project at discount rate of 12%
=-950000 + 370,000/(1.12)^1 +400000/(1.12)^2 + 450000/(1.12)^3
=17442.68
Now NPV for project B at discount rate of 12%
=11134.28
c) PI is Initail investment/ PV of cashflows
For project A =1.02
For Project B=1.1
Hence better for project B
D) Payback period is time in which cashflows woudl be returnes
= 2.4 for project A
=2.1 for proeject B
=
A B -950000 -125000 3,70,000 65000 4,00,000 55000 4,50,000 50000 IRR 13% 18%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.