AST Company is attempting to select among the two mutuallyexclusive projects bot
ID: 2433281 • Letter: A
Question
AST Company is attempting to select among the two mutuallyexclusive projects both of which cost Rs. 100,000. The firm has acost of capital equal to 13%. After-tax cash inflows associatedwith each project are shown in the following table :
Year
Project A (Rs.)
Project B (Rs.)
1
40,000
45,000
2
25,000
25,000
3
35,000
20,000
4
25,000
20,000
5
20,000
20,000
REQUIRED :
(i) Calculate thePayback Period for eachproject. (2+3)
(ii) Calculate theNet Present Value (NPV) of eachproject. (5+5)
(iii) Calculate theInternal Rate of Return (IRR) for eachproject. (6+6) (IRR must be calculated by using “Trial &Error Method with Interpolation Formula”. IRR calculateddirectly by using Excel or Financial Calculators, will not beawarded full marks.)
(iv) Summarize and compare the abovefindings for both projects and indicate which project you wouldrecommend andwhy? (3)
Year
Project A (Rs.)
Project B (Rs.)
1
40,000
45,000
2
25,000
25,000
3
35,000
20,000
4
25,000
20,000
5
20,000
20,000
Explanation / Answer
I have answered this question here: Calculate the PaybackPeriod, Net present Value (NPV), & Internal rate of return(IRR) for each project