ABC Ltd. is considering two mutually exclusive projects. Both require an initial cash outlay of...
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Accounting
ABC Ltd. is considering two mutually exclusive projects. Both require an initial cash outlay of ?20,000 for machinery and have a life of 4 years. The company’s required rate of return is 12% and it pays tax at 40%. The projects will be depreciated on a straight-line basis. The net cash flows (before taxes) expected to be generated by the projects and the present value (PV) factor (at 12%) are as follows:
Year
1
2
3
4
Project 1
8,000
8,000
8,000
8,000
Project 2
10,000
6,000
5,000
7,000
PV factor
0.893
0.797
0.712
0.636
You are required to:
Compute NPV of each project.
Determine which project is more feasible.
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