In: Finance
Digg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($) (including depreciation) are following:
Project A Project B
Year 0 -6000 -17500
Year 1 2000 5600
Year 2 2000 5600
Year 3 2000 5600
Year 4 2000 5600
Year 5 2000 5600
Year 6 4000 9000
If company’s WACC is 13%, find NPV, IRR, Payback and discount payback for each project. If the projects are mutually exclusive what is your recommendation to the company.
If the projects are mutually exclusive, the Project B is recommended since it has higher NPV of $6,519.36 despite contradicting results in IRR and dicounted paback periods method. NPV helps in calcualting the returns in the absolute terms which eases the managerial decision making.