Question
Orange Inc. is considering the following two projects A in Germany and B in India, respectively: Year CF(A) CF(B) 0 -1000000 -500000 1 400000 200000
Orange Inc. is considering the following two projects A in Germany and B in India, respectively:
Year | CF(A) | CF(B) |
0 | -1000000 | -500000 |
1 | 400000 | 200000 |
2 | 500000 | 350000 |
3 | 600000 | 400000 |
The discount rate for Project A is 10 %, and the discount rate for Project B is 15%.
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a) i. If the cash flows are assumed to occur evenly throughout the year, what is the payback period for each project? Show your calculation. (3 marks)
ii. If project A and project B are independent, and the required payback period for the company is 2 years, which project(s) should be accepted? (1 marks)
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b) i. Calculate the profitability index for each project. (3 marks)
ii. Suppose Project A and Project B are mutually exclusive (i.e., you can choose either one of them but not both), which project(s) should be accepted when the profitability index rule is considered? (1 marks)
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c) i. What is the Net Present Value for each project? Show your calculation. (3 marks)
ii. If project A and project B are mutually exclusive, which project(s) should be accepted? (1 marks)
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d) Based on your answer in part (c), discuss whether the IRR would be greater than 10% for each project. (the answer should base on part c, exact IRR for A and B are not required) (3 marks)
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