Question

Winnie is a junior financial analyst of PKP Corporation and has been instruct to analyze two capital investment projects, namely, Project Pfizer and Project AZ. Both of the projects have an equal initial outlay of $80,000 and a cost of capital of 10%. As a senior financial analyst of PKP Corporation, you are required to assist Winnie on the proposed capital investment projects. The projects' expected cash flows are as follows:

 

(a) Calculate the discounted payback period for both projects.

(b) Calculate the net present value (NPV) for both projects.

(c) Calculate the internal rate of return (IRR) for both projects.

(d) If the projects are mutually exclusive, recommend the best project for PKP Corporation. Furthermore, briefly describe the reason for the recommendation.

Answer 1

Part (a):

Discounted pay back period of project Pfizer = 2.77 years

Discounted pay back period of project AZ = 2.54 years

 

Part (b):

NPV of project Pfizer = $30,402.29

NPV of project Pfizer = $43,954.44

 

Part (c ):

IRR of project Pfizer = 27.19%

IRR of project Pfizer = 32.51%

 

Part (d):

If projects are mutually exclusive, the best project is Project AZ

Reason: Project AZ has lower discounted pay back period, higher NPV (though initial investment is equal for both the projects) and higher IRR.

 

Calculation as below: