Lumbini Furniture (Pvt) Ltd. is considering these two projects: Project X and Project Y. Each project has a cost of Rs 20,000,000, and the cost of…
BBS Fundamentals of Financial Management · 2080 · Solved Question with Answer · Video Solution
Lumbini Furniture (Pvt) Ltd. is considering these two projects: Project X and Project Y. Each project has a cost of Rs 20,000,000, and the cost of capital for each project is 15 percent. The expected net cash flows are as follows:
| Year | Expected Net Cash Flows (in thousand ) | |
| Project X | Project Y | |
| 0 | (Rs 20,000) | (Rs 20,000) |
| 1 | 8,000 | 12,000 |
| 2 | 8,000 | 7,000 |
| 3 | 8,000 | 5,000 |
| 4 | 8,000 | 4,000 |
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a. Calculate each project's payback period, net present value, and internal rate of return.
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b. Which project or projects should be accepted if they are independent?
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c. Which project should be accepted if they are mutually exclusive?
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d. How might a change in the cost of capital produce a conflict between the NPV and IRR ranking of these two projects?
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