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Project A Project B Project C Year Outflow Inflow Netflow Outflow Inflow Netflow Outflow Inflow Netflow 0 $150,000 -$150,000 $150,000 -$150,000 $200,000 $200,000 1 $20,000
Project A | Project B | Project C | |||||||||||
Year | Outflow | Inflow | Netflow | Outflow | Inflow | Netflow | Outflow | Inflow | Netflow | ||||
0 | $150,000 | -$150,000 | $150,000 | -$150,000 | $200,000 | $200,000 | |||||||
1 | $20,000 | $20,000 | $130,000 | $40,000 | $90,000 | $150,000 | $150,000 | ||||||
2 | $30,000 | $30,000 | $50,000 | $50,000 | $90,000 | $90,000 | |||||||
3 | $40,000 | $40,000 | $60,000 | $60,000 | $100,000 | $100,000 | |||||||
4 | $40,000 | $40,000 | $90,000 | $90,000 | $110,000 | $110,000 | |||||||
5 | $50,000 | $50,000 | $90,000 | $90,000 | $120,000 | $120,000 |
The company has not yet decided how the selected project will be financed. The cost of capital or hurdle rate will vary depending upon how the company decides to finance the project. You decide to compare projects in three areas: (1) payback period (not considering the cost of capital); NPV sensitivity (see note 1 below); and (3) Internal Rate of Return (IRR).
Based on your analysis, which project would you recommend and why?
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