There are two alternative projects for an expansion of a companys product lines: The first...
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There are two alternative projects for an expansion of a companys product lines: The first option (Option 1) provides standard performance and reliability and costs $6,700,000. The expected cash inflow to the firm is estimated to be $1,200,000 per year after depreciation and tax. The life of this project is 9 years. A competing option (Option 2) is a superior product and costs $11,300,000 and has a life span of 7 years. The cash inflow to the firm from this option is estimated to be $2,300,000 per annum, again after depreciation and tax. This company has a cost of capital of 7% a) Calculate the Internal Rate of Return (IRR), Profitability Index (PI) and Payback period for both options. (10 marks) b) Can NPV be used to rank the projects? If not, what should you do? Explain fully which project should be chosen. (4 marks)
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