Selection of a project in financial management, Financial Management

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Q. Selection of a project in Financial Management ?

The selection of a project is typically made on the following line:

(i) In general a project becomes acceptable if it has a positive NPV

(ii) If there are two or more commonly exclusive projects generally the project whose NPV is higher or highest is selected. Instance: - Two mutually elite investment proposals X and Y under consideration previous to the management of a company. The initial outlay of every project is Rs. 30000. Both the projects are approximate to have a useful economic life span of 5 years. The estimates of cash inflows as well as their certainty equivalent coefficients are as follows:

Year

Project X

Project Y

 

Estimated Cash Flows

C.E.C

Estimated Cash Flows

C.E.C.

1

2

3

4

5

25000

30000

20000

15000

10000

0.7

0.5

0.4

0.3

0.2

30000

35000

25000

12000

10000

0.6

0.5

0.4

0.2

0.1

 

The cost of capital in favour of the company is 15%.

Compare the NPV of the two projects as well as suggest which project should be accepted by the management.

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