DEF Ltd. needs to choose between two projects, each requiring an initial investment of ?25,000...
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DEF Ltd. needs to choose between two projects, each requiring an initial investment of ?25,000 and having a 6-year life. The firm’s required rate of return is 14%, and the tax rate is 35%. Both projects will be depreciated straight-line. The net cash flows (pre-tax) and the PV factor (at 14%) are provided below:
Year | 1 | 2 | 3 | 4 | 5 | 6 |
Project 1 | 7,000 | 8,000 | 9,000 | 10,000 | 8,000 | 7,000 |
Project 2 | 10,000 | 7,000 | 6,000 | 9,000 | 9,000 | 10,000 |
PV factor | 0.877 | 0.769 | 0.675 | 0.592 | 0.519 | 0.456 |
You are required to:
- Determine the NPV for each project.
- Advise which project to undertake.
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