Reference no: EM133104135

Question - Project R delegates all the development work to outside companies. The estimated cashflows for Project R are (where brackets indicate expenditure): Beginning of Year 1 (£150,000) (contractors' fees) Beginning of Year 2 (£250,000) (contractors' fees) Beginning of Year 3 (£250,000) (contractors' fees) End of Year 3 £1,000,000 (sales) Project S carries out all the development work in-house by purchasing the necessary equipment and using the company's own staff. The estimated cashflows for Project S are: Beginning of Year 1 (£150,000) (New equipment) Continuous payments Through Year 1 (£75,000) (Staff Cost) Continuous payments Through Year 2 (£250,000) (Staff Cost) Continuous payments Through Year 3 (£250,000) (Staff Cost) End of Year 3 £1,000,000 (sales)

REQUIRED -

a) Calculate the net present value for Project R and Project S using a risk discount rate of 20% per annum. Using net present values as a criterion, which project is preferable?

b) Find the internal rate of return for Project R and Project S and hence determine which project is more favourable using this criterion.