Company B is deciding which between the 2 projects should it invest in (supported by the cash flow patterns shown below). The company's cost of capital is approximately 9% but due to the current economic environment, its cost of equity may increase and may be a bit more than the approximated value. Year Project 1 Project 2 0 (initial outlay) -13 million -12 million 1 3 million 8 million 2 3 million 6 million 3 5 million 1 million 4 5 million 1 million 5 5 million 1 million 1. calculate the NPV and IRR of both projects 2. which project should the company invest in? would you choose to follow the npv or irr route? explain your answer

Company B is deciding which between the 2 projects should it invest in (supported by the cash flow patterns shown below). The company's cost of capital is approximately 9% but due to the current economic environment, its cost of equity may increase and may be a bit more than the approximated value. Year Project 1 Project 2 0 (initial outlay) -13 million -12 million 1 3 million 8 million 2 3 million 6 million 3 5 million 1 million 4 5 million 1 million 5 5 million 1 million 1. calculate the NPV and IRR of both projects 2. which project should the company invest in? would you choose to follow the npv or irr route? explain your answer

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 7P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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Assume that the company you chose in part a) has been researching the prospects for a range of new investmentopportunities. The cash flow details of two promising projects (which are mutually exclusive) are given below:Year Projected Cash Flows (£m) A B0 -85 -901 10 402 20 353 25 74 65 40Assume that the company’s cost of capital is currently at 10.25 per cent.Assume that all cash flows arise at year ends and straight-line depreciation is used over the life of the project with zeroscrap value. Ignore taxation and inflation.1. Calculate the Payback Period (PBP), Accounting Rate of Return (ARR) and the Net Present Value (NPV) ofthe project. Evaluate the results of these calculations and recommend with reasons which project should beadopted.
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Year	Project 1	Project 2
0 (initial outlay)	-13 million	-12 million
1	3 million	8 million
2	3 million	6 million
3	5 million	1 million
4	5 million	1 million
5	5 million	1 million