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Bath Expert plc manufactures and distributes bathroom fittings to major building supply chains and DIY chains. The board is currently considering two projects to develop a new range of products for the bathroom. The two projects represent levels of ‘luxury’ bathrooms. The cash flows are different for the two product ranges.
The Super Bathroom project will cost $4m and generate $6m net cash over five years. Each year $1m cash is generated, except for the third year when $2m cash is generated. The Superluxury Bathroom project will cost $8m and generate $11m cash flows spread over five years. Each year $2m cash is generate, except for the third when $3m cash is generated.
It may be assumed that all cash flows occur the last day of each year. Bath Expert Plc’s cost of capital is 10%.
a. Calculate the NPV for each project
b. Calculate the IRR for each project
c. Explain the advantage and disadvantage of both methods