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Steers is evaluating two competing investment projects. Both projects require an investment of R30 million. The company cost of capital is 12 percent for projects of this type. The expected cash flows are as follows:
Project 1 Project 2
End-of-year 1 R 3 million R 12 million
End-of-year 2 R 5 million R 9 million
End-of-year 3 R 8 million R 7 million
End-of-year 4 R 10 million R 4 million
End-of-year 5 R 13 million R 3 million
Total cash flows R 39 million R 35 million
Required:
1. Which of the two projects would you recommend? Why?
2. Will your choice be the same, whatever the cost of capital?
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