Question

Your firm is considering two projects with the following cash flows: Cash flows from project B (£000) (500) 200 250 170 25 30 Year Cash flows from project A (£000) 0(500) 167 180 160 100 100 4 1. Calculate the ARR and payback rule 2. If the appropriate discount rate is 12%, rank the two projects 3. Which project is preferred if you rank by IRR? 4. Calculate the discount rate (r) for which the NPVs of both projects are equal 5. Should you use NPV or IRR to choose between the two projects? Explain your choice Discuss the advantages and disadvantages of NPV, IRR, ARR and payback rule. Which method(s) would you prefer as analysts and under which circumstances?

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