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A firm is evaluating two mutually exclusive projects with the following expected cash flows. The initial investment for each project is 300 lakhs. Project A:

A firm is evaluating two mutually exclusive projects with the following expected cash flows. The initial investment for each project is ₹300 lakhs.

Project A:

Year

Cash Flow (₹ in lakhs)

1

120

2

150

3

170

4

190

5

180

Project B:

Year

Cash Flow (₹ in lakhs)

1

100

2

130

3

160

4

200

5

220

The discount rate is 10%.

Required:

  1. Calculate the NPV of both projects.
  2. Determine the IRR for each project.
  3. Calculate the Payback Period for both projects.
  4. Recommend which project the firm should undertake based on financial metrics.
  5. Assess the sensitivity of NPVs to a change in discount rate to 12%.

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