You need to consider two projects which have the following cash flows: Project A requires an initial investment of $10,000 and will generate net cash flows of $5,000 at the end of year 1, $6,000 at the end of year 2, $7,000 at the end of year 3, and $8,000 at the end of year 4. At the end of year 2, maintenance costs of $8,000 will have to be disbursed. Project B requires an initial investment of $15,500 and will generate starting at the end of each following year, net cash flows of $6,000 per year for 6 years. It will incur maintenance costs of $8,000 at the end of year 3.
Assume that the required return is 12% per annum for both projects.
i. Draw timeline showing the cash flows of projects A and B?
ii. Find the NPV of projects A and B?
iii. Which project should be chosen if Projects A and B are mutually exclusive? Explain.
iv. Which project should be chosen if the Projects A and B are completely independent? Explain.
v. Based on the cash flows of project A, explain why IRR is not an appropriate evaluation technique for this project?