- 14 Marks
Question
McPat Investment Limited is considering investing in either of two mutually exclusive projects, namely Axiom and Axis. Each project costs ₦1.5 billion. The cost of capital to the company is 15%. The projected cash flows from the two projects are as stated below:
| Year | Axiom (₦’000) | Axis (₦’000) |
|---|---|---|
| 1 | 220,000 | 200,000 |
| 2 | 220,000 | 200,000 |
| 3 | 240,000 | 220,000 |
| 4 | 240,000 | 220,000 |
| 5 | 300,000 | 340,000 |
| 6 | 300,000 | 340,000 |
| 7 | 280,000 | 280,000 |
You are required to evaluate the projects using the Net Present Value method to decide which one to accept.
Answer
Since both projects have negative NPVs, neither project should be accepted as they will reduce the wealth of McPat Investment Limited.
- Topic: Investment Decisions
- Series: NOV 2021
- Uploader: Theophilus