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)...


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)


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.



Jun 08, 2022
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