Assignment Task: Braxton Enterprises is considering three investment projects. The information of these three projects is as follows.
Project A needs an initial investment of £400,000 now and will generate a net cash inflow of £72,000 in each year in perpetuity.
Project B needs an initial investment of £200,000 now and will generate a net cash flow of 54,000 in each year in perpetuity.
Project C needs an initial investment of £300,000 now and will generate a net cash flow of £30, 000 in the first year that is expected to grow at the rate of 10% per year in perpetuity.
Assume all three projects are in the same business line and required rate of return is 18%.
Required:
(1) Calculate net present value (NPV) and internal rate of return (IRR) for each of the projects.
(2) Advise to the board of directors which project(s) should be selected, and explain the rationale of your decision.
(3) Assume these three projects are not in line with the current business of Braxton. How the firm would set a project-specific discount rate.
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