Question
Omicron Ltd. is considering two investment opportunities, Projects A1 and B1, requiring an initial investment of $160,000 each. The cost of capital is 14 percent.
Omicron Ltd. is considering two investment opportunities, Projects A1 and B1, requiring an initial investment of $160,000 each. The cost of capital is 14 percent. The expected cash flows are as follows:
Expected Net Cash FlowsYear | Project A1 | Project B1 |
0 | ($160,000) | ($160,000) |
1 | 80,000 | 70,000 |
2 | 60,000 | 50,000 |
3 | 40,000 | 30,000 |
4 | 20,000 | 20,000 |
i) Determine the payback period for each project.
ii) Calculate the NPV and IRR for both projects.
iii) Recommend which project to undertake if they are independent.
iv) Identify the project to be accepted if they are mutually exclusive.
v) Evaluate the impact on NPV and IRR if the cost of capital changes to 10 percent.
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