A company is considering which of two mutually exclusive projects should be undertaken. The Finance Director suggested that the project with the higher NPV should be chosen whereas the Managing Director suggested that the one with the higher IRR should be undertaken. Both projects have the same initial investment and length of life. The company anticipates a Discounting Factor of 10% and future cash flows of the projects are as follows:
|
Year
|
Project A
Cash flow
|
Project B
Cash flow
|
|
Investment
|
-200,000
|
-200,000
|
|
1
|
35,000
|
218,000
|
|
2
|
80,000
|
10,000
|
|
3
|
90,000
|
10,000
|
|
4
|
75,000
|
4,000
|
|
5
|
20,000
|
3,000
|
You are required to:
i. Calculate the NPV and IRR of each project.
ii. Recommend, with reasons, which project you would undertake (if either).