Question
Jojo's Bizzare is taking on two projects. The cost of project A is $ 70,000 and the cost of B is $ 140,000. The firms
Jojo's Bizzare is taking on two projects. The cost of project A is $ 70,000 and the cost of B is $ 140,000. The firms cost of capital is 12% per year. After-tax cash flows are estimated to be $ 10,000 per year forever for project A. After-tax cash flow at time 1 will be $12,000 for the project B. However, the future cash flows from Project B are expected to increase by 3% per year forever. Compute NPV and IRR for both projects. Which project should Jojo's undertake? At what growth rate of future cash flows for the project B would Jojo's be indifferent? (NPVA = NPVB )? The cost of capital for both projects is still 12% per year.
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