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Aman Limited is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects
Aman Limited is a leading manufacturer of automotive components. It supplies to the original equipment manufacturers as well as the replacement market. Its projects typically have a short life as it introduces new models periodically. You have recently joined Aman Limited as a financial analyst reporting to Robel, the CFO of the company. He has provided you the following information about two projects. A and B that are being considered by the Executive Committee of Aman Limited: Project A is an extension of an existing line. Its cash flow will decrease over time.] Project B involves a new product. Building its market will take some time and hence its cash flow will increase over time. The expected net cash flows of the three projects are as follows. Year Project A Project B 0 (15000) (15,000) 1 11,000 3,500 27,000 8,000 3 4,800 13,000 Robel believes that both projects have risk characteristics similar to the average risk of the firm and hence the firm's cost of capital, viz. 12 percent, will apply to them. You have been asked to prepare a report for the executive committee, covering the following: a) Find the payback period and the discounted payback period of Projects A and B. (b) Calculate the NPV of projects A and B. (c) Calculate the PI of projects A and B. (d) Calculate the IRR for Projects A and B.
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