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STU Ltd. has to choose between two mutually exclusive projects that require ?60,000 each and...

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Accounting

STU Ltd. has to choose between two mutually exclusive projects that require ?60,000 each and have a life span of 6 years. The required rate of return is 10%, and the tax rate is 40%. Both projects will be depreciated straight-line. The net cash flows (before taxes) and the PV factor (at 10%) are as follows:

Year

1

2

3

4

5

6

Project 1

20,000

18,000

16,000

14,000

12,000

10,000

Project 2

15,000

20,000

15,000

20,000

15,000

20,000

PV factor

0.909

0.826

0.751

0.683

0.621

0.564

You are required to:

  1. Compute the NPV for both projects.
  2. Advise which project is better.

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