Question 3Fisca Ltd Is Considering Two Independent Projects, Project A And Project B. The Initial Cash Outlay Associated With Project A Is P50,000 And The Initial Cash Outlay Associated With Project B Is P70,000. The Required Rate Of Return On Both Projects Is 12%. The Expected Annual Free Cash Flows From Each Project Are As Follows: YEAR PROJECT APROJECT B0-50,000-70,00011200013,00021200013000312000130004120001300051200013000612,00013000Required:a.For both projects, calculateThe net present value.The internal rate of return.The profitability index.Assuming there is capital rationing, advice Fisca ltd which project should be accepted over the other.Explain the limitations of using a profitability index in a situation where there is capital rationing.

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Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 10P: Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year...

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Question 3

Fisca Ltd Is Considering Two Independent Projects, Project A And Project B. The Initial Cash Outlay Associated With Project A Is P50,000 And The Initial Cash Outlay Associated With Project B Is P70,000. The Required Rate Of Return On Both Projects Is 12%. The Expected Annual Free Cash Flows From Each Project Are As Follows:

YEAR	PROJECT A	PROJECT B
0	-50,000	-70,000
1	12000	13,000
2	12000	13000
3	12000	13000
4	12000	13000
5	12000	13000
6	12,000	13000

Required:

a.For both projects, calculate

The net present value.
The internal rate of return.
The profitability index.
Assuming there is capital rationing, advice Fisca ltd which project should be accepted over the other.
Explain the limitations of using a profitability index in a situation where there is capital rationing.

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