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Consider two investment alternatives: Each investment requires a $100,000 initial cash payment. The net income of each investment is as follows: Investment Y: $110,000 each
Consider two investment alternatives:
Each investment requires a $100,000 initial cash payment.
The net income of each investment is as follows:
Investment Y: $110,000 each year for three years
Investment Z: $210,000 in year 1, $60,000 in years 2 and 3, respectively.
Factors to consider:
- Depreciation is estimated at $10,000 per year
- The required rate of return is 10%
- What is the Net Cash Flow from each investment?
- What is the Cash Payback Period from each investment? Which investment is preferred using the payback model?
- What is the Net Present Value of each investment? Which investment is preferred using NPV model? Are both investments acceptable if you can do both?
- Give two comments (advantage/ disadvantage) of the Payback Period model and two comments (advantage/disadvantage) of the NPV model.
- Estimate the Internal Rate of Return (IRR) of Investment A. Explain your reasoning.
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