03 have io. Their final allocated capital budget for this year stands at uso 31.
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Question
03 have io. Their final allocated capital budget for this year stands at uso 31.500.de have requested you to evaluate and rank two project proposals, namely Project TX an employer has had to drop a number of projects as a result of reduced capita our allocation. T heir final allocated c wo project Project BZ. The investments required are USD 12,000,000 and USD 19,000,000 for Pro proposals are given below: Year TX BZ 6 3.0 1.3 4 353.5 2.9 1.5 3.5 3.5 0.4 7.568 6.84,3 2.3 6.8 At a prevailing discount rate of 11% (a) What is the Net Present Value (NPV) for each project? (b) is the Intermal Rate of Return (IRR) for each project? (c) Give your ranking for the two projects on the basis of their NPV and IRR. [6 marks] 6 marks] [4 marks] (d) Should you recommend your employer to implement one or both projects? Give your reason. 13 marks] (e) Briefly describe one situation when the IRR and NPV methods would most likely give conflicting results. 12 marks] (1) Give two types of non-financial criteria your employer should consider when ranking above projects. [4 marks]Explanation / Answer
NPV of TX=-12+1.5/1.11+3.5/1.11^2+3.5/1.11^3+3.5/1.11^4+3.5/1.11^5+3/1.11^6+2.9/1.11^7=2.13457 million
NPV of BZ=-19+6.8/1.11+7.5/1.11^2+6.8/1.11^3+4.3/1.11^4+2.3/1.11^5+1.3/1.11^6+0.4/1.11^7=3.270 million
As both are having NPV greater than zero, both should be accepted
TX: 0=-12+1.5/(1+IRR)+3.5/(1+IRR)^2+3.5/(1+IRR)^3+3.5/(1+IRR)^4+3.5/(1+IRR)^5+3/(1+IRR)^6+2.9/(1+IRR)^7
Hence, IRR of TX=15.9823%
BZ: 0=-19+6.8/(1+IRR)+7.5/(1+IRR)^2+6.8/(1+IRR)^3+4.3/(1+IRR)^4+2.3/(1+IRR)^5+1.3/(1+IRR)^6+0.4/(1+IRR)^7
Hence, IRR of BZ=18.3005%
As both are having IRR greater than MARR of 11%, both should be accepted
Using NPV, BZ ranks higher than TX
Using IRR, BZ ranks higher than TX
As both projects are value accretive, both should be accepted given the total investment required is 12+19=31 million and the budget is 31.5 million
NPV and IRR disagree When cash flows are not normal, i.e, cash outflow occurs apart from intiial investment as well
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