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Question - You are an employee of a company called Choices (Pty) Ltd and since the financial manager knows that you have just passed the financial management module for your qualification, he approached you to help him with the financing decision regarding two projects.
He shared the following information for the two projects with you: Cash inflows:
Project A
Project B
Year 1
600,000
500,000
Year 2
650,000
520,000
Year 3
680,000
560,000
Year 4
700,000
590,000
Year 5
710,000
640,000
Total cash inflows
3,340,000
2,810,000
The initial cost for both projects is R1,000,000.
The internal rate of return (IRR) is 25% for project A and 7% for project B.
The financial manager is of the opinion that the company should invest in project A, as this project generates more cash inflows for the same initial cost.
Required -
1. Calculate the net present value for each project.
2. Advise the financial manager whether project A is the better project based on your calculations.
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