The business is considering two proposals for their promotions of the professional courses.Proposal one could give a stable return throughout the period. Proposal Two would give higher return only in initial years.
Proposal 1 Proposal - 2
Initial Cost (2,000,000) (2,000,000)
Cash flow Y1 350,000 2,180,000
Y2 800,000 100,000
Y3 900,000 100,000
Y4 750,000 40,000
Y5 200,000 30,000
The Marketing director thinks that the proposal with the highest Net Present Value (NPV) should be chosen where as the sales director thinks that the one with the highest internal rate of Return (IRR) should be undertaken, especially as both proposals have the same initial outlay and length of life. The company anticipates a cost of capital of 10% .
Calculate the following
• Payback period
• Net present Value
• Internal Rate of Return
What are the advantages of each method.