Question
King, Inc. has the following mutually exclusive projects available. The company has historically used a 4-year cut-off for projects. The required return is 11 percent.
King, Inc. has the following mutually exclusive projects available. The company has historically used a 4-year cut-off for projects. The required return is 11 percent.
Year | Cash Flow (Project X) | Cash Flow (Project Y) |
0 | -$82,000 | -$125,000 |
1 | 15,700 | 38,600 |
2 | 18,300 | 33,400 |
3 | 23,900 | 31,200 |
4 | 26,200 | 27,500 |
5 | 32,100 | 24,000 |
(a) | Calculate the Payback period of both projects. | (4 marks) |
(b) | State two advantages and two disadvantages of Payback period rule? | (4 marks) |
(c) | Calculate the IRR of both projects. | (2 marks) |
(d) | Under what circumstances IRR may generate wrong decision? Why? | (4 marks) |
(e) | Calculate the NPV of both projects. | (2 marks) |
(f) | Which project should you accept and what is the best reason for that decision? | (4 marks) |
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