FIN 302 Lecture Notes - Lecture 11: Payback Period, Cash Flow, Net Present Value
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7 Mar 2018
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Mr Yaqoob is a financial analyst for M/s Sheeraz & Co. The director of capital budgeting has asked Yaqoob to analyze two proposed capital investments, Projects X and Y. Each project has a cost of Rs. 5,000, and the cost of capital for each project is 10 percent. The projects’ expected net cash flows are as follows:
|
Expected Net Cash Flows |
|
Year |
Project X |
Project Y |
0 |
Rs. (5000) |
Rs. (5000) |
1 |
3250 |
1750 |
2 |
1500 |
1750 |
3 |
1500 |
1750 |
4 |
500 |
1750 |
- Calculate each project’s payback period, net present value (NPV), and internal rate of return (IRR). [3]
- Which project or projects should be accepted if they are independent? [0.5]
- Which project should be accepted if they are mutually exclusive? [0.5]
d. How might a change in the cost of capital produces a conflict between the NPV and IRR rankings of these two projects?