ABS is evaluating two projects which have similar risk characteristics; their cost of capital is 10 per cent.
Project A Project B
Now -2,000,000 -2,000,000
End-of-year 1 200,000 1,400,000
End-of-year 2 1,200,000 1,000,000
End-of-year 3 1,700,000 400,000
Required:
1. Calculate the net present value (NPV) of each project. According to the NPV rule, which project should be accepted if they are independent? What if they are mutually exclusive?
2. Calculate the payback period and the discounted payback period of each project. If two projects are mutually exclusive, which project should be accepted?
3. Calculate the internal rate of return of each project. Which project should be accepted if they are independent and which project should be accepted if they are mutually exclusive?