You are a financial analyst for the Gaurishanker Herbal Company. The director of capital budgeting has asked you to analyze two proposed capital…
BBS Fundamentals of Financial Management · 2081 · Solved Question with Answer
You are a financial analyst for the Gaurishanker Herbal Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Project X and Project Y. These projects are mutually independent projects. Each project has a cost of Rs 100,000 and the cost of capital for each project is 10 percent. The expected net cash flows are as follows:
| Year | Expected Net Cash Flows | |
| Project X | Project Y | |
| 0 | (Rs 100,000) | ( Rs 100,000) |
| 1 | 40,000 | 50,000 |
| 2 | 40,000 | 60,000 |
| 3 | 40,000 | 40,000 |
| 4 | 40,000 | 18,000 |
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a. Calculate PBP of each project. If firm has set a maximum payback period of three years, suggest as to which project's should be accepted?
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b. Calculate net present value (NPV) of each project. Which project's should be accepted?
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c. Calculate the internal rates of return (IRR) of each project's. Evaluate the project on the basis of IRR
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d. Which method of evaluating the project is superior? Why?