You have been asked by MPAC Ltd to analyse two projects, X and Y. Each project costs £1,000,000, and the company's cost of capital is 10 percent per annum. The expected net cash flows are as follows: Year 1 2 3 4 Project X £600,000 £500,000 £300,000 £100,000 Project Y £200,000 £300,000 £400,000 £675,000 Required: a) Calculate the following for each project: i) ii) net present value modified internal rate of return ii) discounted payback period
You have been asked by MPAC Ltd to analyse two projects, X and Y. Each project costs £1,000,000, and the company's cost of capital is 10 percent per annum. The expected net cash flows are as follows: Year 1 2 3 4 Project X £600,000 £500,000 £300,000 £100,000 Project Y £200,000 £300,000 £400,000 £675,000 Required: a) Calculate the following for each project: i) ii) net present value modified internal rate of return ii) discounted payback period
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 21P
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![You have been asked by MPAC Ltd to analyse two projects, X and Y. Each project costs
£1,000,000, and the company's cost of capital is 10 percent per annum. The expected net cash
flows are as follows:
Project X
£600,000
£500,000
£300,000
£100,000
Project Y
£200,000
£300,000
£400,000
£675,000
Year
1
3
4
Required:
Calculate the following for each project:
i)
ii)
iii)
a)
net present value
modified internal rate of return
discounted payback period
b)
Which project(s) should be accepted if they are independent? Explain why.
c)
How might a change in the cost of capital produce a conflict between the net present
value and internal rate of return rankings of these two projects? Would this conflict exist
if the cost of capital were changed? Why does the conflict exist? Discuss critically.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb0bafe14-2582-4876-9a6c-db8972e6979a%2Fbcfd705a-f2a9-4013-b04a-fed995225adf%2Fur06ec6_processed.jpeg&w=3840&q=75)
Transcribed Image Text:You have been asked by MPAC Ltd to analyse two projects, X and Y. Each project costs
£1,000,000, and the company's cost of capital is 10 percent per annum. The expected net cash
flows are as follows:
Project X
£600,000
£500,000
£300,000
£100,000
Project Y
£200,000
£300,000
£400,000
£675,000
Year
1
3
4
Required:
Calculate the following for each project:
i)
ii)
iii)
a)
net present value
modified internal rate of return
discounted payback period
b)
Which project(s) should be accepted if they are independent? Explain why.
c)
How might a change in the cost of capital produce a conflict between the net present
value and internal rate of return rankings of these two projects? Would this conflict exist
if the cost of capital were changed? Why does the conflict exist? Discuss critically.
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