Consider the following two sets of project cash flows: Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Discount Rate X -903 175.6 169.8 201.4 251.5 299.2 305.2 0.1037 Y -513 190.5 195.5 90.5 80.5 85.5 110.5 0.1037 A) Assume that projects X and Y are mutually exclusive. The correct investment decision and the best rational for that decision is to: i) invest in Project Y since IRRY > IRRX. ii) invest in Project Y since NPVY > NPVX. iii) neither of the above. B) What are the incremental IRR and NPV of Project X? C) Is the use of the incremental measures in B) appropriate to your evaluation of the preferred project? Explain.
Consider the following two sets of project cash flows:
Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Discount
Rate
X -903 175.6 169.8 201.4 251.5 299.2 305.2 0.1037
Y -513 190.5 195.5 90.5 80.5 85.5 110.5 0.1037
A) Assume that projects X and Y are mutually exclusive. The correct investment decision and
the best rational for that decision is to:
i) invest in Project Y since IRRY > IRRX.
ii) invest in Project Y since NPVY > NPVX.
iii) neither of the above.
B) What are the incremental
C) Is the use of the incremental measures in B) appropriate to your evaluation of the
preferred project? Explain.
D) Which is the preferred project? Explain and justify the basis for your choice.
(6 marks)
2) Due to the demands of the new ATO Single Tough Reporting System, a successful manufacturing
company is assessing the introduction of a new computer system to improve regulatory reporting
compliance. The managing director wants to install a new Pay Perfect system, whereas the Chief
Financial Officer prefers the Complete Pay system. Each system provides the same recordkeeping ability, and can provide the required information to the Tax Office. The initial cost of each
system is $15,000, but because of differing software, maintenance, and processing requirements,
estimates of the after-tax costs of operation differ. These are as follows:
Period Pay
Perfect
Complete
Pay
1 3,800 5,500
2 4,900 6,000
3 4,900 6,300
4 4,900 6,300
5 4,900 5,100
6 4,900
7 4,500
The firm has an after tax weighted cost of capital of 11.45 per cent.
A) Can you determine the IRR for each project? Explain.
B) Determine the NPV for each project. Which project does NPV suggest you recommend?
C) Is NPV the correct tool with which to make your recommendations? Explain.
D) Using an appropriate method, determine which system you would recommend to the
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