3 questions

Solution 1
            First Proposal
            Year    0    1    2    3
            Upfront investment    100
            Savings        60    60    60
            Net cash flow    -100    60    60    60
            Second Proposal
            Year    0    1    2    3
            Upfront investment    20
            Further investment        35    35    35
            Savings        60    60    60
            Net Cash flow    -20    25    25    25
            Calculation of incremental cash flows                        Calculation of IRR and NPV of individual proposal
            Year    0    1    2    3            IRR        NPV
            Net cash flow under first proposal    -100    60    60    60        1st Proposal    36%        44.11
            Net cash flow under second proposal    -20    25    25    25        2nd Proposal    112%        40.05
            Incremental cash flows    -80    35    35    35
            Calculation of IRR of incremental cash flows
            Year    0    1    2    3
            Incremental cash flows    -80    35    35    35
            IRR    15%
            Calculation of NPV of incremental cash flows
            Year    0    1    2    3
            Incremental cash flows    -80    35    35    35
            Cost of capital    12%
            NPV    4.06
            Decision
            On the basis of IRR second proposal should be accepted due to higher rate of return. On the other hand first proposal should be accepted on the basis of net presnet value due to higher net prsesent value.
            But when there is conflict between the decision of NPV and IRR the decision of NPV will prevail and hence Proposal One will be selected.
Solution 2
        i.    Calculation of free cash flows
            Year    0    1    2    3    4    5    6    7    8    9    10
            Sales revenue        30000    30000    30000    30000    30000    30000    30000    30000    30000    30000
            less: cost of goods sold        18000    18000    18000    18000    18000    18000    18000    18000    18000    18000
            Gross Profit        12000    12000    12000    12000    12000    12000    12000    12000    12000    12000
            General expenses        2000    2000    2000    2000    2000    2000    2000    2000    2000    2000
            Depreciation        2000    2000    2000    2000    2000    2000    2000    2000    2000    2000
            Net operating income        8000    8000    8000    8000    8000    8000    8000    8000    8000    8000
            less: income tax @20%        1600    1600    1600    1600    1600    1600    1600    1600    1600    1600
            Net income        6400    6400    6400    6400    6400    6400    6400    6400    6400    6400
            Add: Depreciation        2000    2000    2000    2000    2000    2000    2000    2000    2000    2000
            Operating cash flow        8400    8400    8400    8400    8400    8400    8400    8400    8400    8400
            Initial invetsment    25000
            Working capital    10000
            Recovery of working capital                                            10000
            Salvage value                                            5000
            Free cash...