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Question 1: Capital Budgeting (7 marks) The Meacham Tire Company is considering two mutually exclusive projects with useful lives of 3 years. The after-tax cash
Question 1: Capital Budgeting (7 marks) The Meacham Tire Company is considering two mutually exclusive projects with useful lives of 3 years. The after-tax cash flows for projects A and B are listed below. Year 0 1 2 3 Project A -$60,000 $38,000 $25,000 $35,000 Project B -$95,000 $0 $0 $180,000 The required rate of return on these projects is 14 percent. a. Compute the payback period for each project. According to this method, which project is more attractive? Briefly explain your answer. (2 marks) b. Compute the net present value for each project. According to this method, which project is more attractive? Briefly explain your answer. (3 marks) C. Based on the above analysis, what decision should be made? Which project should be accepted? Briefly justify your answer. (2 marks)
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