Question

Sefalana (Pty) Ltd is evaluating two projects that have an expected life of five years and an initial investment outlay of P1 million. Below are the estimated net cash inflows for each project:

Year	Cash flows - Project A (Pula)	Cash flows -Project B (Pula)
1	300,000	400,000
2	320,000	400,000
3	370,000	400,000
4	430,000	400,000
5	550,000	400,000

The cost of capital for both projects is 10 per cent.

Required:

Advise management on the project that they can invest in based on the following:

Net Present Value (NPV).                                               

Sefalana (Pty) Ltd is evaluating two projects that have an expected life of five years and an initial investment outlay of P1 million. Below are the estimated net cash inflows for each project:

Year	Cash flows - Project A (Pula)	Cash flows -Project B (Pula)
1	300,000	400,000
2	320,000	400,000
3	370,000	400,000
4	430,000	400,000
5	550,000	400,000

The cost of capital for both projects is 10 per cent.

Required:

Advise management on the project that they can invest in based on the following:

a. Net Present Value (NPV).                                               

b. Internal Rate of Return (IRR).                                                                       

Answer 1

Answer : Calculation of Net Present Value of Project A

Below is the table showing Net Present Value of Project A

Year	Cash Inflows	PVF @ 10%	Present Value of Cash Inflow
1	300000	0.909091	272727.2727
2	320000	0.826446	264462.8099
3	370000	0.751315	277986.4763
4	430000	0.683013	293695.7858
5	550000	0.620921	341506.7277
	Total Present Value of Cash Inflows		1450379.072
	Less: Present Value of Cash Outflow		1000000
	Net present Value		450379.07

Below is the table showing Net Present Value of Project B

Year	Cash Inflows	PVF @ 10%	Present Value of Cash Inflow
1	400000	0.909091	363636.3636
2	400000	0.826446	330578.5124
3	400000	0.751315	300525.9204
4	400000	0.683013	273205.3821
5	400000	0.620921	248368.5292
	Total Present Value of Cash Inflows		1516314.708
	Less: Present Value of Cash Outflow		1000000
	Net present Value		516314.71

Based on Net Present Value , we should Accept Project B as it has higher Present Value .

(b.) Below is the sheet showing Calculation of IRR

Exact IRR calculation is

Since the IRR of Project B is more than IRR of Project A therefore Accept Project B.