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Q10 Your superior has just handed you the estimated cash flows for two proposed projects. Project X would take some time to build up the
Q10 Your superior has just handed you the estimated cash flows for two proposed projects. Project X would take some time to build up the market and its cash flow would increase over time. Project Y on the other hand, would experience a decrease in a cash flow over time. Both projects have 3-year lives. Here are the projects net cash flows (in thousands of Ghana cadis). Project X Project Y (1000) (1000) 100 700 600 500 800 200 Depreciation, salvages values and net working capital requirements, and tax effect are included in these cash flows. Both projects have risk characteristics that are similar to firm's average project. Your company's WACC is 10%. You must determine whether one or both projects should be accepted. (a) Differentiate between mutually exclusive projects and independent projects Year 0 1 2 3 (b) What is the payback period and what is its rationale? Find the pay back for project X and Y? (c) If the company's maximum acceptable payback is 2 years, indicate which of the projects should be accepted if (1) they are mutually exclusive (2) independent? (d) What is the rationale behind the NPV method? Based on the NPV method, what project or projects should be accepted if they are: (1) Independent and (2) mutually exclusive
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