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Kirksville Company is considering two mutually exclusive investments. The projects expected net cash flows are as follows: Year Expected Net Cash Flows Project A Project
| Kirksville Company is considering two mutually exclusive investments. The projects expected net cash flows are as follows: | ||
| Year | Expected Net Cash Flows | |
| Project A | Project B | |
| 0 | -$1,300 | -$405 |
| 1 | $300 | $100 |
| 2 | $200 | $100 |
| 3 | $100 | $100 |
| 4 | $600 | $100 |
| 5 | $600 | $100 |
| Assume the required rate of return is 10%. | ||
| (1) Assuming that the projected future net cash flows for each project (from year 1 through 7) are net income, find the AAR? If you use the AAR method for capital budgeting analysis, which project would you choose? The target AAR is 10%. Explain. | ||
| (2) Find the crossover rate. You are absolutely required to provide the equation. | ||
| (3) Sketch the NPV profile for both projects. At least 5 points should be plotted. | ||
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Financial Reporting and Analysis
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon
6th edition
9780077632182, 78025672, 77632184, 978-0078025679
