Question: Projects A & B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.
|
|
Project A
|
Project B
|
|
Initial Investment (CF0)
|
Rs. 80,000
|
Rs. 50,000
|
|
Year (t)
|
Cash inflows (CFT)
|
|
1
|
Rs. 15,000
|
Rs. 15,000
|
|
2
|
20,000
|
15,000
|
|
3
|
25,000
|
15,000
|
|
4
|
30,000
|
15,000
|
|
5
|
15,000
|
15,000
|
[A] Compute the internal rate of return [IRR] for each project.
[B] Compute each project's payback period.
[C] Compute the net present value [NPV] for each project.
[D] Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
[E] Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain your answer.