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Hong Kong Budget Airlines is evaluating an expansion project. The management plans to maintain the current capital structure with 40% of debt and 60% of equity. The cost of capital is 12%. The project can generate the following cash flows for three years with details as listed below:
Year Project A
0 (200,000)
1 200,000
2 750,000
3 (800,000)
Required:
Question a. Compute Net Present Value (NPV) of the project and advise the management if the project should be undertaken.
Question b. One of the management argued that IRR and NPV will give the same decision all the time. State the decision criteria of the IRR and advise if his argument is correct. (no word limited)
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