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A company is considering two mutually exclusive projects, Project X and Project Y. The projects have the following projected cash flows over a 3-year period:
A company is considering two mutually exclusive projects, Project X and Project Y. The projects have the following projected cash flows over a 3-year period:
Project X:
- Year 0: $(120)
- Year 1: $60
- Year 2: $40
- Year 3: $30
Project Y:
- Year 0: $(100)
- Year 1: $30
- Year 2: $50
- Year 3: $60
The required rate of return is 8%.
a. What is the difference between independent and mutually exclusive projects? b. Calculate the traditional payback period for Project X and Project Y. c. Explain the concept of discounted payback period and calculate it for both projects. d. What are the main disadvantages of the traditional payback period method? e. Determine the better project based on NPV and IRR.
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