QUESTION Four: Plisterd Plc is considering investing in two mutually exclusive projects. A strategy utilized...
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QUESTION Four: Plisterd Plc is considering investing in two mutually exclusive projects. A strategy utilized by its Board of Directors as advised by its Chief Finance Officer is the certainty equivalent approach The Chief Finance Officer has provided the following estimated cash flow and certainty equivalents for each project to its Board of Directors in a Board Meeting. Project 1 Project 2 YEAR YEAR 1 2 3 4 1 2 3 4. Chief Financial -30,000 15,000 15,000 10,000 40,000 25,000 20,000 15,000 Officer Cash Flow Certainty 1.00 0.95 0.85 0.70 1.00 0.90 0.80 0.70 Equivalents Required: i 11. Which project do you think the Chief Finance Officer recommended to the Board of Directors using the Net Present Value Method (NPV)? Assume that the Risk free discount rate is 15 %. 20 Marks The Internal Rate of Retum (IRR) is one of the other methods used for deciding which project to be undertaken. Explain this method and identify its drawbacks. 5 Marks TOTAL=25 Marks
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