Question
Newfoundland Distillers is considering two mutually exclusive projects: Gin and Brandy. The following information is provided for the two projects. The appropriate discount rate for
Newfoundland Distillers is considering two mutually exclusive projects: Gin and Brandy. The following information is provided for the two projects.
The appropriate discount rate for both projects is 10%.
| Gin | Brandy | |
| Initial cash outlay | $20,000 | $30,000 |
| After-tax cash flows | ||
| Year 1 | $11,000 | $7,000 |
| Year 2 | $8,500 | $9,000 |
| Year 3 | $7,500 | $11,000 |
| Year 4 | $16,000 |
Required:
a) (10 marks) Calculate the NPV of both projects.
b) (5 marks) Calculate the payback periods of both projects.
c) (5 marks) Calculate the profitability index (PI) of both projects.
d) (10 marks) Which project should the firm choose using the information in (A) (C)? Justify your answer?
Under what conditions will the NPV be a better capital budgeting criterion than the PI?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Foreign Investment And Spillovers
Authors: Magnus Blomstrom
1st Edition
1138025976,1317685121
