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Question: A company is considering two mutually exclusive projects.

05 Sep 2024,3:54 AM

 

A company is considering two mutually exclusive projects. Both require an initial cash outlay of Rs 10,000 (with no salvage value) and have a life of 5 years. The company’s required rate of return is 10 per cent, and it pays tax at a rate of 35 per cent. The project will be depreciated on a straight line basis for tax purposes. The cash flows (before depreciation and taxation) expected to be generated by the projects are as follows: Year 1 2 3 4 5 Project A (Rs) 4,000 4,000 4,000 4,000 4,000 Project B (Rs) 6,000 3,000 2,000 5,000 5,000 Calculate the net present value and the IRR for each project, and suggest which project should be accepted and why.

 

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