PQR Ltd. needs to evaluate two projects requiring an initial investment of ?40,000 each and...
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PQR Ltd. needs to evaluate two projects requiring an initial investment of ?40,000 each and a life of 5 years. The firm's cost of capital is 9%, and it pays tax at 30%. Depreciation is straight-line. The net cash flows (before taxes) and the PV factor (at 9%) are provided below:
Year | 1 | 2 | 3 | 4 | 5 |
Project 1 | 11,000 | 12,000 | 13,000 | 14,000 | 15,000 |
Project 2 | 10,000 | 11,000 | 12,000 | 13,000 | 14,000 |
PV factor | 0.917 | 0.842 | 0.772 | 0.708 | 0.650 |
You are required to:
- Calculate the NPV for each project.
- Determine which project is preferable.
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