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DEF Ltd. needs to choose between two projects, each requiring an initial investment of ?25,000...

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Accounting

DEF Ltd. needs to choose between two projects, each requiring an initial investment of ?25,000 and having a 6-year life. The firm’s required rate of return is 14%, and the tax rate is 35%. Both projects will be depreciated straight-line. The net cash flows (pre-tax) and the PV factor (at 14%) are provided below:

Year

1

2

3

4

5

6

Project 1

7,000

8,000

9,000

10,000

8,000

7,000

Project 2

10,000

7,000

6,000

9,000

9,000

10,000

PV factor

0.877

0.769

0.675

0.592

0.519

0.456

You are required to:

  1. Determine the NPV for each project.
  2. Advise which project to undertake.

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