ABC Ltd. is considering two mutually exclusive projects. Both require an initial cash outlay of...
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Accounting
ABC Ltd. is considering two mutually exclusive projects. Both require an initial cash outlay of ?20,000 for machinery and have a life of 4 years. The company’s required rate of return is 12% and it pays tax at 40%. The projects will be depreciated on a straight-line basis. The net cash flows (before taxes) expected to be generated by the projects and the present value (PV) factor (at 12%) are as follows:
Year | 1 | 2 | 3 | 4 |
Project 1 | 8,000 | 8,000 | 8,000 | 8,000 |
Project 2 | 10,000 | 6,000 | 5,000 | 7,000 |
PV factor | 0.893 | 0.797 | 0.712 | 0.636 |
You are required to:
- Compute NPV of each project.
- Determine which project is more feasible.
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