A company wants to decide which project to undertake out of two projects A and B. For this purpose, it wants to evaluate each project that have the same initial investment (cost) but different cash flows for the next three years. The following table gives information on these two projects. The discount rate to be used is 8 percent, which is the WACC for the company. Use two methods of capital budgeting: The Net Present Value (NPV) Method and the Internal Rate of Return (IRR) Method, to evaluate and compare the two projects. Based on the outcome of calculations, choose the best project A or B and explain your decision for each method. Show all your work for each method step by step. Initial Investment and Cash Flows of Projects A and B in AED Project A Project B Initial Investment - 150,000 - 150,000 Year 1 Cash flow 20,000 50,000 Year 2 Cash flow 90,000 90,000 Year 3 Cash flow 70,000 60,000
A company wants to decide which project to undertake out of two projects A and B. For this purpose, it wants to evaluate each project that have the same initial investment (cost) but different cash flows for the next three years. The following table gives information on these two projects. The discount rate to be used is 8 percent, which is the WACC for the company. Use two methods of capital budgeting: The
Initial Investment and Cash Flows of
Projects A and B in AED
|
|
Project A |
Project B |
|
Initial Investment |
- 150,000 |
- 150,000 |
|
Year 1 Cash flow |
20,000 |
50,000 |
|
Year 2 Cash flow |
90,000 |
90,000 |
|
Year 3 Cash flow |
70,000 |
60,000 |
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