Question

REFeasibilty Ltd is an Australian real estate company. The financial manager is currently analysing two projects and evaluating the potential of the investment opportunity. The estimated initial investment outlay and after-tax cash flows (incremental) associated with each project are shown in the following table:
Project A Project B
Initial investment ($40,000,000) ($25,000,000)

Year Cash inflows
1 $2,200,000 $1,687,500
2 $2,288,000 $88,000
3 $2,380,000 $1,860,000
4 $2,475,000 $1,953,000
5 $2,574,000 $2,051,000
6 $2,677,000 $2,154,000
7 $42,832,000 $29,183,000

Assume the required rate of return is 7.00% (discount rate), find:
(a) The net present value for project A then project B. (2 mark)




(b) The internal rate of return (IRR) for project A then project B. (2 mark)




(c) Based on your results for part (a) and (b) which project is preferred and why? (1 mark)

Answer 1

Question a:

Net Present Value of Project A is -$1,821,901.32

Net Present Value of Project B is $733,555.33

Question b:

Internal Rate of Return for Project A is 6.16%

Internal Rate of Return for Project B is 7.51%

Question c:

NPV rule says Project should be accepted only if NPV>0

IRR rule says Project should be accepted only if IRR > Discount rate

In the problem Project B satisfies both the conditions

Hence Project B should be selected