PART B PART B is worth 20 marks. Each question is worth 5 marks. QUESTION 1 (Cap

Question

PART B PART B is worth 20 marks. Each question is worth 5 marks. QUESTION 1 (Capital Budgeting) Two projects A and B are mutually exclusive and will be repeated indefinitely. Project A requires an initial investment of $10,000 in an asset with a life of 3 years and the project (of the same timeframe) has an NPV of $36,882.04. Project B requires arn initial investment of $30,000 in an asset with a life of 5 years and the project (of the same timeframe) has an NPV of $51,206.70. The cost of capital for both projects is 10%. Which is the better project? Explain with illustrations.

Explanation / Answer

This is a example of life disparity - We need to calculate annual Present worth - Divide NPV by Annuity factor = Project A Project B NPV 36882.04 51206.7 Years 3 5 Discount rate 10% 10% PVAF(10%, Years) 2.487 3.791 Annual PW 14830.81 13508.2 Project A is better with higher annual flow Please provide feedback…. Thanks in advance…. :-)

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