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Fiftycent Inc. has hired you to advise the firm on a capital budgeting issue involving two unequal-lived,

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Fiftycent Inc. has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, S and T. The cash flows for each project are presented in the following table. Calculate the NPV and the annualized net present value (ANPV) for each project, using the firm’s cost of capital of 9%. Which project would you recommend?

Project S Project T Initial investment -$42,000 -$67,500 Year Cash inflows $17,750 $26,400 2 24,600 22,600 37,000 3 36,8

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... Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the... 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...
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Project S Project T Initial investment -$42,000 -$67,500 Year Cash inflows $17,750 $26,400 2 24,600 22,600 37,000 3 36,800 4 19,700 10,900 6. 15,350 9,780

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ANPV may be obtained in two steps 1 find NPV for projects S and T and ii find the annual cash paymen...View the full answer


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Principles of Managerial Finance

Principles of Managerial Finance

ISBN: 978-0134476315

15th edition

Authors: Chad J. Zutter, Scott B. Smart

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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