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E6: You are considering two mutually exclusive projects, A and B. The initial cash outlay (i.e. cost) for both projects is 4,000 . The project
E6: You are considering two mutually exclusive projects, A and B. The initial cash outlay (i.e. cost) for both projects is 4,000 . The project A, will generate one cash inflow of 5,000 at the end of year 5. Project B will generate cash inflows of 1,000 at the end of every second year into a perpetuity. The annual discount rate is 10%. Project A -4,000 5,000 1 1 0 1 2 3 4 5 Project B -4,000 1,000 1,000 1,000 T 1 0 1 2 3 4 5 6 a) Which project would you prefer using the PB decision rule? Explain your reasoning. (0.2 points); b) Which project would you prefer using the NPV decision rule? Explain your reasoning. (0.4 points); c) What are the IRRs of the two projects? Which project would you prefer using the IRR decision rule? Explain your reasoning. (0.4 points)
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