Bob Sponge has been retained to analyze two proposed capital investment projects, projects X and Y, by

Question:

Bob Sponge has been retained to analyze two proposed capital investment projects, projects X and Y, by Square Pants, Inc., a local specialty retailer. Project X is a sophisticated working capital and inventory control system based upon a powerful personal computer, called a system server and PC software specifically designed for inventory processing and control in the retailing business. Project Y is a similarly sophisticated working capital and inventory control system based upon a powerful personal computer and general- purpose PC software. Each project has a cost of $10,000, and the cost of capital for both projects is 12%. The projectsâ€™ expected net cash flows are as follows:

A. Calculate each projectâ€™s nominal payback period, net present value (NPV), internal rate of return (IRR), and profitability index (PI).
B. Should both projects be accepted if they are interdependent?
C. Which project should be accepted if they are mutually exclusive?
D. How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? At what values of k would this conflict exist? (Hint: Plot the NPV profiles for each project to find the crossover discount rate k.)
E. Why does a conflict exist between NPV and IRRrankings?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...