Question
A firm is considering two capital investment options. The initial investment for Project Alpha is $25,000, and for Project Beta, it is $22,000. Yearly Cash
A firm is considering two capital investment options. The initial investment for Project Alpha is $25,000, and for Project Beta, it is $22,000.
Yearly Cash Flows
- Year 1: Project Alpha - $7,000; Project Beta - $6,000
- Year 2: Project Alpha - $8,500; Project Beta - $5,500
- Year 3: Project Alpha - $9,000; Project Beta - $4,800
- Year 4: Project Alpha - $7,000; Project Beta - $4,200
Requirements: (a) Compute the NPV for both projects using a discount rate of 8%. (b) Determine the IRR for both projects. (c) Based on the NPV, which project should be chosen? (d) Discuss the potential impact of varying the discount rate on the NPV calculation. (e) Consider the risk factors that might affect the cash flows and discuss how these could influence the decision.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To solve the given problem we will proceed step by step for each requirement We will start by calculating the Net Present Value NPV and the Internal Rate of Return IRR for both projects Then we will d...
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Step: 2
Step: 3
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Accounting
Authors: Carl s. warren, James m. reeve, Philip e. fess
21st Edition
978-0324188004
