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a) Calculate the Internal Rate of Return (IRR), Profitability Index (PI) and Payback period for both options. b) Can NPV be used to rank the projects? If not, what should you do? Explain fully which project should be chosen. c) What are some of the advantages that are associated with the use of the NPV in analysing projects?

a) Calculate the Internal Rate of Return (IRR), Profitability Index (PI) and Payback period for both options. b) Can NPV be used to rank the projects? If not, what should you do? Explain fully which project should be chosen. c) What are some of the advantages that are associated with the use of the NPV in analysing projects?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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There are two alternative projects for an expansion of a company's product lines: The first option is a high-quality offer that costs $4,000,000. The expected cash inflow to the firm is estimated to be $900,000 per year after depreciation and tax. The life of this project is 12 years. The second option costs $7,000,000 with a life span of 9 years. The cash inflow to the firm from this option is estimated to be $1,600,000 per annum, again after depreciation and tax. This company has a cost of capital of 13% a) Calculate the Internal Rate of Return (IRR), Profitability Index (PI) and Payback period for both options. b) Can NPV be used to rank the projects? If not, what should you do? Explain fully which project should be chosen. c) What are some of the advantages that are associated with the use of the NPV in analysing projects?
Transcribed Image Text:There are two alternative projects for an expansion of a company's product lines: The first option is a high-quality offer that costs $4,000,000. The expected cash inflow to the firm is estimated to be $900,000 per year after depreciation and tax. The life of this project is 12 years. The second option costs $7,000,000 with a life span of 9 years. The cash inflow to the firm from this option is estimated to be $1,600,000 per annum, again after depreciation and tax. This company has a cost of capital of 13% a) Calculate the Internal Rate of Return (IRR), Profitability Index (PI) and Payback period for both options. b) Can NPV be used to rank the projects? If not, what should you do? Explain fully which project should be chosen. c) What are some of the advantages that are associated with the use of the NPV in analysing projects?
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