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A business has $100,000 to invest in either Project R or Project S with the following cash flows: Project R: Year 1: $20,000 Year 2:

A business has $100,000 to invest in either Project R or Project S with the following cash flows:

Project R:

  • Year 1: $20,000
  • Year 2: $30,000
  • Year 3: $40,000
  • Year 4: $50,000
  • Year 5: $60,000

Project S:

  • Year 1: $10,000
  • Year 2: $20,000
  • Year 3: $30,000
  • Year 4: $40,000
  • Year 5: $50,000

The discount rate is 14%.

Required:

  1. Compute for each project:
    • Simple payback period
    • Discounted payback period
    • Net present value
    • Internal rate of return
    • Profitability index
  2. Advise the company on which project to invest in.

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