Mr Charles Mongoery Burns,of Springfield Nuclear Power Plant Ltd,must make a choice between two mutually exclusive investments.The cash flow from these projects($,in '000's) and their internal rate of returns,are as followsProjectCF0CF1CF2CF3IRRRed-1000+300+500+65018.5%Yellow-600+220+400+27021.8%The company's oppurtunity cost of capital is 11% p.a.a.Calculate the net present value for each projectb.Compare the internal rate of return and net present value methods of investment evaluation.Do these methods always lead to comparable recommendation?If not,why not?

Capital budgeting is a process used by the companies to use its limited resources to get the best…

Answered: a.Calculate the net present value for…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 4P

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Mr Charles Mongoery Burns,of Springfield Nuclear Power Plant Ltd,must make a choice between two mutually exclusive investments.The cash flow from these projects($,in '000's) and their internal rate of returns,are as follows

Project	CF0	CF1	CF2	CF3	IRR
Red	-1000	+300	+500	+650	18.5%
Yellow	-600	+220	+400	+270	21.8%

The company's oppurtunity cost of capital is 11% p.a.

a.Calculate the net present value for each project

b.Compare the internal rate of return and net present value methods of investment evaluation.Do these methods always lead to comparable recommendation?If not,why not?

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