Question
For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places. If
For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places.
If any parts of the question use values from earlier parts, use the EXACT values from earlier parts.
QUESTION START
Milano Co. is considering two mutually exclusive projects with the same cost of capital of 13%. The estimated net cash flows are as follows:
a) Calculate the NPV for each project. Explain which project you would choose, if any, using the NPV criterion.
b) If wanted to use the Internal Rate of Return (IRR) method to decide between Projects X and Y above, can we automatically assume it will come to the same decision as the NPV method above (without doing any calculations)? Explain your answer.
c) Calculate the payback period (PP) for each project. Give your answer in years, to 2 decimal places. Then state which project is preferable under the PP criterion.
d) State and explain 2 weaknesses of the IRR method as compared with the NPV method.
e) Name one advantage and one disadvantage of the payback period method as compared with the NPV method.
f) Give 2 reasons why investment projects may be mutually exclusive in practice.
Year 1 WNPC Project X -$490 $280 $250 $110 Project Y -$540 $310 $650 $320 wStep by Step Solution
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