Calculate the net present value for project

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Reference no: EM131878634

Consider an Australian owned company listed on the Australian Securities Exchange. Due to capital rationing, suppose the company is required to choose one of two investment projects: project A or project B. Project A is of 3 years length and has net cash flows before tax, in years 1-3 respectively, as follows: $100,000, $200,000, $150,000. Project B is of 4 years length and has net cash flows before tax, in years 1-4 respectively, as follows: $100,000, $50,000, $150,000, $200,000. The initial outlay for each project is $250,000. Assume a discount rate of 8% per annum for each project. Capital budgeting for the company is performed on a before tax basis. (a) Calculate the net present value (NPV) for project A and project B. Should the project with the higher NPV be chosen? Explain your answer. (b) Calculate the equivalent annual cost (EAC) for project A and project B. The equivalent annual cost (EAC) is also called the equivalent annual annuity (EAA). Which investment project would the company choose? Explain your answer.(c) Explain what is meant by capital rationing in capital budgeting.

Reference no: EM131878634

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