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Problem 10.1 A company is considering two mutually exclusive projects. Both require an initial cash outlay of ?10,000 each, and have a life of five years. The company’s required rate of return is 10 per cent and pays tax at a 50 per cent rate. The projects will be depreciated on a straight-line basis. The before taxes cash flows expected to be generated by the projects are as follows: Before-tax Cash Flow (?) Project | 1 | 2 | 3 | 4 | 5 A | 4,000 | 4,000 | 4,000 | 4,000 | 4,000 B | 6,000 | 3,000 | 2,000 | 5,000 | 5,000 Calculate for each project: (1) the payback, (2) the average rate of return, (3) the net present value and profitability index, and (4) the internal rate of return. Which project should be accepted and why?

          Problem 10.1 A company is considering two mutually exclusive projects. Both require an initial cash outlay of ?10,000 each, and have a life of five years. The company’s required rate of return is 10 per cent and pays tax at a 50 per cent rate. The projects will be depreciated on a straight-line basis. The before taxes cash flows expected to be generated by the projects are as follows:

Before-tax Cash Flow (?)
Project | 1 | 2 | 3 | 4 | 5
A | 4,000 | 4,000 | 4,000 | 4,000 | 4,000
B | 6,000 | 3,000 | 2,000 | 5,000 | 5,000

Calculate for each project: (1) the payback, (2) the average rate of return, (3) the net present value and profitability index, and (4) the internal rate of return. Which project should be accepted and why?

Problem 10.1 A company is considering two mutually exclusive projects. Both require an initial cash outlay of ?10,000 each, and have a life of five years. The company’s required rate of return is 10 per cent and pays tax at a 50 per cent rate. The projects will be depreciated on a straight-line basis. The before taxes cash flows expected to be generated by the projects are as follows:

Before-tax Cash Flow (?)
Project | 1 | 2 | 3 | 4 | 5
A | 4,000 | 4,000 | 4,000 | 4,000 | 4,000
B | 6,000 | 3,000 | 2,000 | 5,000 | 5,000

Calculate for each project: (1) the payback, (2) the average rate of return, (3) the net present value and profitability index, and (4) the internal rate of return. Which project should be accepted and why?

Added by Hayden S.

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