Reference no: EM132618619

Assume yourself as a financial analyst for the Great Land Company. Then, the director of capital budgeting asks you to analyses two proposed capital investments named Project A and Project B. Each project has a cost of 900,000 birr, and the cost of capital (the required rate of return) for each project is 10%. The information on the projects' expected net cash flows are as follows with the present value of 1 birr at 10%.

Year Cash flow of the projects in Birr

Year         Project A           Project B              PV of 1birr at 10%

0             - 900,000          - 900,000                    1

1               400,000             245,000                0.909

2                350,000             245,000               0.826

3                250,000               245,000              0.751

4                150,000                245,000            0.683

5                100,000                 245,000             0.621

Required:

Problem a) Calculate each project's payback period (PBP) and determine which project is preferable as per PBP results.

Problem b) Calculate each project's net present value (NPV).

Problem c) Determine and justify which project or projects should be accepted as per NPV results if they are independent projects.

Problem d) Determine and justify which project or projects should be accepted as per NPV if they are mutually exclusive projects.

Problem e) Calculate the internal rate of return (IRR) for each project and determine whether the projects are accepted or rejected as per IRR result and also determine which project is preferable based on IRR.

Problem f) Discuss the relative strengths and limitations of the capital budgeting decision criteria that you have used above (Payback period, NPV and IRR).