Thomas Company is considering two mutually exclusive projects. The firm, which has a 12% cost of capital,
Question:
a. Calculate the NPV of each project, and assess its acceptability.
b. Calculate the IRR for each project, and assess its acceptability.
c. Draw the NPV profiles for both projects on the same set of axes.
d. Evaluate and discuss the rankings of the two projects on the basis of your findings in parts a, b, and c.
e. Explain your findings in part d in light of the pattern of cash inflows associated with eachproject.
Project A Project B Initial investment (CFo) $130,000 85,000 Year (t) Cash inflows (CF) $25,000 35,000 45,000 50,000 55,000 $40,000 35,000 30,000 10,000 5,000 4
Step by Step Answer:
a and b Project A CF 0 130000 CF 1 25000 CF 2 35000 CF 3 45000 CF 4 50000 CF 5 55000 Set I 12 NPV A ...View the full answer
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Related Video
The internal rate of return, or IRR, is a metric used to measure the profitability of an investment. It is the discount rate that makes the net present value of an investment equal to zero. To calculate the IRR, we need to know the investment\'s cash flows. These are the inflows and outflows of cash that will result from the investment. For example, an investment in a property might have cash outflows for the purchase price, closing costs, and any renovations, and cash inflows from rent and eventual sale of the property. The IRR is the discount rate at which the NPV of the investment is equal to zero. There are many ways to calculate IRR, from simple spreadsheet functions to more complex financial modeling software. It\'s worth noting that IRR can be a bit tricky when it comes to projects that don\'t have a consistent cash flow over time. These types of investments are known as \"irregular cash flow\" and the IRR might be misleading or not suitable to calculate. There are other metrics to evaluate these investments such as Modified Internal Rate of Return (MIRR) which is a variation of IRR and is used to get more accurate results.
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