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1. A&B Enterprises is trying to select the best investment from among three alternatives. Each alternative involves an initial outlay of $100,000. The companys cost
1. A&B Enterprises is trying to select the best investment from among three alternatives. Each alternative involves an initial outlay of $100,000. The companys cost of capital is 10%. The incremental after tax cash inflows for each project are as follows:
Year AB C
1 2 3 4 5
$20,000 20,000 20,000
30,000 60,000
$50,000 40,000 30,000
0 0
$25,000 25,000 25,000
25,000 25,000
a) Payback
1) Calculate the payback period (2 decimal) for each project (2 marks)
2) Evaluate and rank each alternative (i.e. 1st, 2nd, 3rd) based on payback period. (1 marks)
b) Net Present Value (NPV)
1) Calculate the NPV for each project (2 marks)
2) Evaluate and rank each alternative (i.e. 1st, 2nd, 3rd) based on the net present value. Are there any projects you would not
recommend? Why? (2 marks)
c) Profitability Index (PI)
1) Calculate the PI (2 decimal) for each project (2 marks)
2) Evaluate and rank each alternative (i.e. 1st, 2nd, 3rd) based on the PI. (1 marks)
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