Reference no: EM133495828
Perpetual Ltd is a multinational corporation and is considering the following two mutually exclusive projects (i.e. Project A and B). Year 0 1 2 3 4 Project A -17,500 7,000 7,000 7,000 7,000 Project B -8,500 5,000 5,000 5,000 Project A requires initial investment of $17,500 upfront and then followed by a series of free cash flow of $7,000 per year for the next four years. Project B requires initial investment of $8,500 upfront and then then followed by a series of free cash flow of $5,000 per year for the next three years.
A. Given cost of capital as 9% and assuming that you are going to replace Project A and Project B forever (i.e. perpetuity approach), which project should you undertake? Explain why?
B. In general, the internal rate of return (IRR) rule tend to agree with the net present value (NPV) rule for a stand-alone project if all of the project's negative cash flows precede its positive cash flows. Under what conditions the IRR rule can lead to incorrect decisions. Discuss.
C. While payback rule is being used by many companies because of its simplicity, it is not as reliable as net present.