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problem: Miller Electronics is considering two new investments. Project C calls for the purchase of a coolant recovery system. Project H represents an investment in a heat recovery system. The firm wishes to use a NPV profile in comparing the projects. The investment & cash flow patterns are as follows:

Project C 

Project H

($25,000 investment) 

($25,000 investment)

Year

Cash Flow

Year

Cash Flow

1

$6,000

$1

$20,000

2

7,000

2

6,000

3

9,000

3

5,000

4

13,000

 

 

[A] If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 8 percent? (Use the net present value profile for your decision; no actual numbers are necessary.)

[B] If the two projects are mutually exclusive (the selection of one precludes the selection of the other), what would be your decision if the cost of capital is (1) 5%, (2) 13%, (3) 19%? Use the net present value profile for your answer.

[C] find out the NPV of the projects based on a zero discount rate.

[D] find out the net present value of the projects based on a nine percent discount rate.

[E]The internal rate of return on Project C is 13.01%, and the internal rate of return on Project H is 15.68%. Graph a net present value profile for the two investments similar to Figure 12-3. [Use a scale up to $10,000 on the vertical axis, with $2,000 increments. Use a scale up to 20% on the horizontal axis, with 5 percent increments.]

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M916910

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