Solution - 1.

CALCULATION OF NPV AND IRR

Opportunity Cost of Capital 0.11

Year Project A Project B
0 -100000 -100000
1 32000 0
2 32000 0
3 32000 0
4 32000 0
5 32000 200000
NPV 18268.70 18690.27
IRR 18.03% 14.87%

Solution - 2.

INCOME STATEMENT

Details Firm P Firm Q

Sales (quantity) 20000 25000
Sales Price ( p. u.) 15 20
Variable Cost (p. u.) 10 15
Fixed Cost 15000 40000
Interest 30000 25000
No of Equity Shares 5000 9000
Tax rate 0.30 0.3

Sales 300000 500000

Variable Cost 200000 375000
Contribution Margin 100000 125000
EBIT 85000 85000
Profit before tax 55000 60000
Tax 16500 18000
Profit after tax 38500 42000
AND IRR

Firm R Firm S Leverages

30000 40000 Operating Leverage
25 30 Financial Leverage
20 25 Combined Leverafge
50000 60000 Earning per Share
35000 40000
10000 12000
0.3 0.3

750000 1200000
600000 1000000
150000 200000
100000 140000
65000 100000
19500 30000
45500 70000
Firm P Firm Q Firm R Firm S
1.176 1.471 1.500 1.429
1.545 1.417 1.538 1.400
1.818 2.083 2.308 2.000
7.700 4.667 4.550 5.833