Question

Xerox Ltd. is an existing profit-making company. It is engaged in the manufacture of complex photocopiers and scanners. The project with the following costs and cash flows are being considered by the company:

                                    Project I Project II

                                          $ $

0 (240,000) (240,000)

1 62,000 142,000

2 70,000 70,000

3 100,000 82,000

4 140,000 40,000

The company's cost of capital is 15%

i) Calculate the NPV of both the projects.

ii) Calculate the IRR of both the projects.

iii) Comment on calculations in (i) and (ii) above.

Answer 1

Project I
Year	Cash Flows	PVIF @ 15%	Present Value
0	-240000	1	$        (240,000)
1	62000	0.87	$            53,940
2	70000	0.756	$            52,920
3	100000	0.658	$            65,800
4	140000	0.572	$            80,080
NPV			$            12,740
IRR	17%	use the excel formula
Project II
Year	Cash Flows	PVIF @ 15%	Present Value
0	-240000	1	$        (240,000)
1	142000	0.87	$          123,540
2	70000	0.756	$            52,920
3	82000	0.658	$            53,956
4	40000	0.572	$            22,880
NPV			$            13,296
IRR	18%
Project II has greater NPV and IRR than project I Select Project II