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In: Finance

Your manager has tasked you with evaluating two alternative projects for the company’s expansion: The first...

Your manager has tasked you with evaluating two alternative projects for the company’s expansion:

The first option costs $200,000 with the expected cash inflow to the firm estimated at $60,000 per year after depreciation and tax. The life of this project is 7 years.

The second option costs $350,000 and has a life span of 10 years. The cash inflow to the firm from this option is estimated to be $80,000 per annum, again after depreciation and tax.

This company has a cost of capital of 15%. Assume other similar projects will be implemented at the end of these two projects, whichever is chosen.

  1. Calculate, for both projects, the:
    1. Internal Rate of Return (IRR)
    2. Net Present Value
    3. Profitability Index (PI) and;
    4. Payback period for project 1 and 2.
  2. Can NPV be used to rank the projects? If not, what should you do? Explain fully which project should be chosen.
  3. Identify, describe and discuss some of the limitations associated with the use of the NPV in analysing projects?   

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Expert Solution

jeff jeffy answered 1 year ago
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