XYZ Ltd. is evaluating two exclusive projects that require an initial investment of ?30,000 each...
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Accounting
XYZ Ltd. is evaluating two exclusive projects that require an initial investment of ?30,000 each and have a life of 5 years. The company’s cost of capital is 15% and it pays tax at 30%. Depreciation is on a straight-line basis. The projects' net cash flows before taxes and the PV factors (at 15%) are given below:
Year | 1 | 2 | 3 | 4 | 5 |
Project 1 | 12,000 | 12,000 | 10,000 | 8,000 | 6,000 |
Project 2 | 9,000 | 11,000 | 11,000 | 10,000 | 9,000 |
PV factor | 0.870 | 0.756 | 0.658 | 0.572 | 0.497 |
You are required to:
- Calculate the NPV for both projects.
- Decide which project should be accepted.
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