If any parts of the question use values from earlier parts, use the EXACT values from earlier parts.

QUESTION START

ABC Co. is considering two mutually exclusive projects with the same cost of capital of 12%. The estimated net cash flows are as follows:

year	project x	project y
0	-$500	-$450
1	$320	$280
2	$230	$600
3	$500	-$150

b) Discuss two problems of using payback period in capital budgeting decisions in the context of Projects X and Y. (2 marks)

c) Calculate the NPV for each project. Explain which project, if any, you would choose using the NPV criterion. (3 marks)

d) Explain why the NPV method is the recommended approach among different capital budgeting measures. (2 marks)

e) Discuss the practical issues associated with the choice of cost of capital for the NPV method. (1 mark)

f) Give 2 reasons why investment projects may be mutually exclusive in practice. (2 marks)