ICO Company must decide between two mutually exclusive projects-00086
This subjective question is related to the book/course
vu bif501 Bioinformatics II.
It can also be found in
vu bif501 Mid Term Solved Past Paper No. 2.
Question 1: ICO Company must decide between two mutually exclusive projects. The following information describes the cash flows of each project.
Project A, Io= -Rs20000, Yr1 = +Rs10000, Yr2= Rs8000, Yr3= Rs6000
Project B, Io= -Rs24000, Yr1= +Rs10000, Yr2=Rs10000, yr3=Rs10000
In simple NPV =
Project A=-20000+10000+8000+6000/(1.15)^3 = Rs2630.19
Project B= -24000+10000+10000+10000/(1.15)^3 = Rs 3945.29
The firm will decide to take the 2nd project B. becz its NPV is greater tha project A.
| Year | Project A | Project B |
| 0 | Rs. (20,000) | Rs. 24,000 |
| 1 | 10,000 | 10,000 |
| 2 | 8,000 | 10,000 |
| 3 | 6,000 | 10,000 |
- Assume that 15% is the appropriate required rate of return. What decision should the firm make about these two projects?
- If the firm reevaluated these projects at 10%, what decision should the firm make about these two projects?
Answer:
We have 2 project A , BProject A, Io= -Rs20000, Yr1 = +Rs10000, Yr2= Rs8000, Yr3= Rs6000
Project B, Io= -Rs24000, Yr1= +Rs10000, Yr2=Rs10000, yr3=Rs10000
In simple NPV =
Project A=-20000+10000+8000+6000/(1.15)^3 = Rs2630.19
Project B= -24000+10000+10000+10000/(1.15)^3 = Rs 3945.29
The firm will decide to take the 2nd project B. becz its NPV is greater tha project A.
