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1. Consider the following two mutually exclusive projects ( X and Y). Whichever project you choose, if any, you require a 10 percent return on
1. Consider the following two mutually exclusive projects ( X and Y). Whichever project you choose, if any, you require a 10 percent return on your investment. a. Calculate the payback period for each project. ( 6 marks) b. Calculate the net present value (NPV) of each project ( 6 marks) c. Based on your answers in (a), (b) as well as the given IRR, which project will you finally choose? Explain. ( 3 marks) 2. FAG Inc., is considering an expansion project that requires an initial fixed asset investment of $4.2 million. The fixed asset will be depreciated straight-line to zero over its three-year life, after which time it will be worthless. The project also requires an initial investment in net working capital (NWC) of $420,000. The project is estimated to generate $3,500,000 in annual sales, with costs of $1,680,000. Suppose the tax rate is 20 percent and the required return is 10 percent. a. Determine the OCF for the expansion project. ( 3 marks) b. What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (8 marks) c. What is the project's NPV? Should the project be accepted? Explain. (4 marks)
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