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problem: Klott Corporation has a weighted average cost of capital of 11% for projects of average risk. Projects of below average risk have a cost of capital of 9%, while projects of above average risk have a cost of capital equal to 13%. Projects A & B are mutually exclusive, whereas all other projects are independent. None of the projects will be repeated. The given table summarizes the cash flows, internal rate of return (IRR), & risk of each of the projects.

Year (t)

Project A

Project B

Project C

Project D

Project E

0

($200,000)

($100,000)

($100,000)

($100,000)

($100,000)

1

66,000

30,000

30,000

30,000

40,000

2

66,000

30,000

30,000

30,000

25,000

3

66,000

40,000

30,000

40,000

30,000

4

66,000

40,000

40,000

50,000

35,000

Determine which projects will the firm select for investment?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M918154

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