LS0861: A company is considering which of two mutually exclusive projects it should undertake. The Finance Director thinks that the project with the higher NPV should be chosen whereas the Managing Director thinks that the one with the higher IRR should be undertaken

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Question: A company is considering which of two mutually exclusive projects it should undertake. The Finance Director thinks that the project with the higher NPV should be chosen whereas the Managing Director thinks that the one with the higher IRR should be undertaken.
Both projects have the same length of life but different initial outflows.

The company anticipates a cost of capital of 10% and the net after tax cash flows of the projects are as follows:

Calculate the NPV and IRR of each project. Also, state with reasons which project you would recommend.


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