Identify the cost of capital at which your recommendation in (b) would be reversed.

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ompany is considering which of two mutually exclusive projects it should undertake.

 

The finance director thinks that the project with the higher NPV should be chosen whereas the managing director thinks that the one with the higher IRR should be undertaken especially

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as both projects have the same initial outlay and length of life. The company anticipates a

cost of capital of 10 per cent and the net cash flows of the projects are as follows:

 

                   Project X          Project Y

Year            £000                £000

0                (200)                 (200)

1                35                      218

2                80                         10

3                90                       10

4                75                       4

5                20                        3

Requirements

(a) Calculate the NPV and IRR of each project.

(b) Recommend, with reasons, which project you would undertake (if either).

(c) Explain the inconsistency in ranking of the two projects in view of the remarks of the directors.

(d) Identify the cost of capital at which your recommendation in (b) would be reversed.

 

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