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A company is considering the relative merits of two product creation projects, called Project P and Project Q, which are mutually exclusive; i.e. they are
A company is considering the relative merits of two product creation projects, called Project P and Project Q, which are mutually exclusive; i.e. they are independent ways of achieving the same thing. The most likely incremental return on investment cash-flow profiles are as given in the Table below. Note that Cash out (= investment) (-), while (+) Cash in (= cash flow income) (in Rm), and EOY = "End of Year Project P Project EOYO -1,20 -1,50 EOY1 0,25 0,50 EOY2 0,50 0,75 3 0,50 0,50 4 0,75 0,25 EOY5 0,50 0,25 The company has set a financially acceptable threshold of 12% rate of return per annum (called the marginal rate of return, or MRR) compounded for such projects. Based on the relevant calculation, which of these two options should it choose on the basis of the given data? Note that the initial investment for each project is not the same. Also calculate the NPVs (Net Present Values) of projects P and Q at a MRR of 26.5%. Comment on the result
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