LS1805: Kongo and Sons is considering two mutually exclusive projects. Both need a initial cash outlay of Rs. 10,000 each, and have a life of five years. Company’s required rate of return is 10 percent and pays tax at a 50 per cent rate. The projects are going to be depreciated on a traight line basis. The before taxes cash flows expected to be generated by the projects are as follows

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Question: Kongo and Sons is considering two mutually exclusive projects. Both need a initial cash outlay of Rs. 10,000 each, and have a life of five years. Company’s required rate of return is 10 percent and pays tax at a 50 per cent rate. The projects are going to be depreciated on a traight line basis. The before taxes cash flows expected to be generated by the projects are as follows:

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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?


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