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Question 6 Consider the cash flows of two mutually exclusive projects for Tadcaster Rubber Company...

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Question 6 Consider the cash flows of two mutually exclusive projects for Tadcaster Rubber Company in Table 1. Project A has an initial cost of 620,000 while Project B has an initial cost of 500,000. The cash inflows from each project are shown in Table 1. Assume the discount rate for Tadcaster Rubber Company is 7%. Year 1 2 3 4 WN Project A (in ) Project B (in ) 172,000 255,000 183,000 133,000 198,000 224,000 268,000 5,000 Table 1 (a) Calculate the payback period (PP) of each project. Based on the PP method, which project should be chosen? [9 marks] (b) Calculate the net present value (NPV) of each project. Based on the NPV method, which project should be chosen? [9 marks] (c) Do you observe any contradictions in the decision results obtained from the project appraisal using the PP and NPV method? Which project should be chosen for investment? Justify your answer. [7 marks]

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