Project R delegates all the development work to outside companies. The estimated cashflows for Project R are (where brackets indicate expenditure): Beginning of Year 1 Beginning of Year 2 Beginning of Year 3 End of Year 3 (£150,000) (£250,000) (£250,000) (contractors' fees) (contractors' fees) (contractors' fees) (sales) £1,000,000 Project S carries out all the development work in-house by purchasing the necessary equipment and using the company's own staff. The estimated cashflows for Project S are: Beginning of Year 1 Continuous payments Through Year 1 Continuous payments Through Year 2 Continuous payments Through Year 3 End of Year 3 (£150,000) (£75,000) (£250,000) (£250,000) (New equipment) (Staff Cost) (Staff Cost) (Staff Cost) (sales) £1,000,000 a) Calculate the net present value for Project R and Project S using a risk discount rate of 20% per annum. Using net present values as a criterion, which project is preferable? b) Find the internal rate of return for Project R and Project S and hence determine which project is more favourable using this criterion.
Project R delegates all the development work to outside companies. The estimated cashflows for Project R are (where brackets indicate expenditure): Beginning of Year 1 Beginning of Year 2 Beginning of Year 3 End of Year 3 (£150,000) (£250,000) (£250,000) (contractors' fees) (contractors' fees) (contractors' fees) (sales) £1,000,000 Project S carries out all the development work in-house by purchasing the necessary equipment and using the company's own staff. The estimated cashflows for Project S are: Beginning of Year 1 Continuous payments Through Year 1 Continuous payments Through Year 2 Continuous payments Through Year 3 End of Year 3 (£150,000) (£75,000) (£250,000) (£250,000) (New equipment) (Staff Cost) (Staff Cost) (Staff Cost) (sales) £1,000,000 a) Calculate the net present value for Project R and Project S using a risk discount rate of 20% per annum. Using net present values as a criterion, which project is preferable? b) Find the internal rate of return for Project R and Project S and hence determine which project is more favourable using this criterion.
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
Problem 1PS
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