Reed River Apiary is considering which of two mutually exclusive project it should undertake to expand its covidex production considering the booming business. The finance director thinks that the project with the higher NPV should be chosen, whereas the managing director thinks that the one with the higher IRR should be undertaken, especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10%, and the net after tax cash flows of the projects are as follows: Year Project M Project N “000” “000” 0 (200) (200) 1 35 218 2 80 10 3 90 10 4 75 4 5 20 3 Required: Calculate the IRR of each project. and recomend, with reasons, which project you would undertake (if any).
Reed River Apiary is considering which of two mutually exclusive project it should undertake to expand its covidex production considering the booming business. The finance director thinks that the project with the higher NPV should be chosen, whereas the managing director thinks that the one with the higher IRR should be undertaken, especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10%, and the net after tax cash flows of the projects are as follows: Year Project M Project N “000” “000” 0 (200) (200) 1 35 218 2 80 10 3 90 10 4 75 4 5 20 3 Required: Calculate the IRR of each project. and recomend, with reasons, which project you would undertake (if any).
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
Problem 1P
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Reed River Apiary is considering which of two mutually exclusive project it should undertake to expand its covidex production considering the booming business. The finance director thinks that the project with the higher
|
Year |
Project M |
Project N |
|
|
“000” |
“000” |
|
0 |
(200) |
(200) |
|
1 |
35 |
218 |
|
2 |
80 |
10 |
|
3 |
90 |
10 |
|
4 |
75 |
4 |
|
5 |
20 |
3 |
Required:
- Calculate the IRR of each project. and recomend, with reasons, which project you would undertake (if any).
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