Dorian International has $75,000 that it can invest for 2.5 years. After that, the funds are needed to repay an outstanding bond issue. The company has two potential projects that are within the funding limit. Project A has an initial cost of $40,000 and cash flows of $24,000 a year for 2 years. Project B has an initial cost of $75,000 and cash flows of $27,000 a year for 4 years. If the required rate of return on both projects is 12 percent, what is your recommendation?
1- Accept Project A and reject Project B
2- Reject Project A and accept Project B
3- Accept either Project A or Project B, but not both.
4- Reject both projects
5- Accept both projects
| Amount | 75000 | 2.5 Years |
| required rate of return | 12% | |
| Project A | ||
| 01-01-18 | -40000 | |
| 01-01-19 | 27000 | |
| 01-01-20 | 27000 | |
| XIRR | 22.57% | |
| Project B | ||
| 01-01-18 | -75000 | |
| 01-01-19 | 27000 | |
| 01-01-20 | 27000 | |
| 01-01-21 | 27000 | |
| 01-01-22 | 27000 | |
| XIRR | 16.36% |
Therefore accept project A following are the reasons:
1.Time period in project B is 4 years but the company is required to pay back its bond after 2.5 years
2. project A is generate more return when compared to project B and rate of return is higher in case of project A and it take 2 years for generating required cash flows
Therefore company should choose only project A and investing remaning cash i.e (75000-40000)=35000 in risk free securities to generate more returns
Get Answers For Free
Most questions answered within 1 hours.