Problem
The following information about two mutually exclusive projects R and S are relevant for requirements. Max-W Company is considering investing in project R, which will require an outlay of $900 million. The project will have a four-year life and at the end of that time, the equipment will be scrapped.
The project is expected to generate the following annual cash flows:
|
|
Year-1
|
Year-2
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Year-3
|
Year-4
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|
Cash inflows
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$690m
|
$590m
|
$570m
|
$480m
|
|
Cash outflows
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$280m
|
$220m
|
$220m
|
$200m
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The company has a required rate of return of 9.61%. The company normally has two-year payback criteria.
The alternative project-S offers the following net cash flows:
Year-0 ($900m); Year-1 $254m; Year-2 $315m; Year-3 $443m and Year-4 $501m.
1. Calculate the (a) NPV, (b) IRR, (c) PVI, (d) Payback period, (e) Discounted payback period for projects R and S.
2. Calculate the crossover rate (between projects R and S) based on the cash flow data mentioned above. Show the range of required rates for which either project-R or project-S would be preferred.
3. Based on your findings in requirements a and b above, what would be the decision of selection of project (when the required rate of return is 9.61 percent)?