Calculate the internal rate of return (IRR) for each project. Discuss any conflict in ranking that may exist between NPV and IRR. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why
Question 3:
Juhayna Food Industries is attempting to select the best of three mutually exclusive projects.
The initial investment and after-tax
|
Cash flow |
Project A |
Project B |
Project C |
|
Initial Investment |
100000 |
120,000 |
130,000 |
|
Year 1 Cash Inflows |
30000 |
36,500 |
38000 |
|
Year 2 cash inflows |
35000 |
45000 |
20000 |
|
Year 3 cash inflows |
40000 |
40000 |
42000 |
|
Year 4 cash inflows |
38000 |
35000 |
45000 |
|
Year 5 cash inflows |
20000 |
30000 |
50000 |
Taking into consideration that the cost of debt 7% , cost of
To compute the firm's cost of the capital where
Cost of debt = 7%
Cost of preferred stock = 12%
Cost of common stock = 15%
Weight of long term debt = 30%
Weight of preferred stock = 20%
Weight of common stock equity = 50%
The firm's cost of capital is 12%.
- Calculate the
internal rate of return (IRR) for each project. - Discuss any conflict in ranking that may exist between NPV and IRR.
- Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why
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