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problem: Projects A & B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.

 

Project A

Project B

Initial Investment (CF0)

Rs. 80,000

Rs. 50,000

Year (t)

Cash inflows (CFT)

1

Rs. 15,000

Rs. 15,000

2

20,000

15,000

3

25,000

15,000

4

30,000

15,000

5

15,000

15,000

[A] Compute the internal rate of return [IRR] for each project.

[B] Compute each project's payback period.

[C] Compute the net present value [NPV] for each project.

[D] Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.

[E] Summarize the preferences dictated by each measure, and indicate which project you would recommend. describe your answer.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M917850

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