Question
(1) Due to the recent decline in stock price, Suncor Inc is considering the following two mutually exclusive projects. Suppose Suncor Inc currently has: 5,000
(1) Due to the recent decline in stock price, Suncor Inc is considering the following two mutually exclusive projects. Suppose Suncor Inc currently has: 5,000 8-year, 6% semi-annual coupon bonds at par (face value = $1,000); 4,0000 shares outstanding, price = $161.84. = 1.21. Market risk premium: 6%; Risk-free rate: 2%; Tax rate: 35%.
Year | Project A | Project B |
0 | -$48000 | -$126900 |
1 | $18400 | $69700 |
2 | $31300 | $80900 |
3 | $11700 | $0 |
Which project should you accept and why? (6 marks)
(2) Net present value and Internal Rate of Return use the same data and the same time value of money theory in their computations. Why then is net present value considered to be a superior measure when making capital budgeting decisions? (2 marks)
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