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P.V. of sts of Internal Transportation - System 1 (Rs. Million) iment (6x1.000) 6.000 Auu Annual operati st (1x4.917) 4.917 10.917 Less : Salvage at the end of 6 years (2x0.705) 1.410 P.V. cash o 9.507 P.V. cs of Internal Transportation - System 2 (Rs. Million) Init estment (4x1.000) 4.000 Ac annual operating cost (0.9x3.465) 3.1185 7.1185 Less : Salvage value at the end of 6 years (1.5*0.792) 1.188 P.V. cash outflow 5.9305 Equivalent Annual Cost 9.507 System 1 = = Rs. 1.93 Million 4.917 5.9305 System 2 = = Rs. 1.71 Million 3.465 Analysis: The equivalent annual cost of System 2 is less than Sysem 1. Hence, System 2 is suggested to takeup. Illustration 3: 34 projects is should undertake. The Finance Director thinks that the project with the higher NPV should be chosen whereas the Managing Director think that the one with the higher IRR should be undertaken especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10% and the net after-tax cash flows of the projects are as follows: Year 0 1 2 3 4 5 Cash Flows: Project X Project Y 80 90 75 20 (200) 35 (200) 218 10 10 4 3 Required: (a) Calculate the NPV and IRR of each project. (b) State, with reasons, which project you would recommend (c) Explain the inconsistency in the ranking of the two projects. The discount factors are as follows: 0 1 2 0.83 3 4 5 0.75 0.68 0.62 1 0.91 Year Discount Factors: (10%) (20%) 1 0.83 0.69 0.58 0.48 0.41

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