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Question 2 (25 marks) - Capital Budgeting Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same
Question 2 (25 marks) - Capital Budgeting Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment of $12,000. Mike Steal Company has a doubt about which investment opportunity is going to provide a higher return to the company. Year Investment A Investment B 2021 2022 $8,600 8,300 8,400 $9,000 9,500 9,000 2023 1 Required: a. Compute the present value of the cash inflows for each investment using a 14% discount rate. Show the formula and calculation steps for the full mark. (8 marks) Amount of Cash Flows Present Value of Cash Flows Year(s) Investment Investment B Investment A Investment B A 2021 $8,600 $9,000 2022 8,300 9,500 2023 8,400 9,000 Total b. Compute Net Present Value. (6 marks) Investment A Investment B Present Value of Cash Flows Initial Cost Net Present Value (NPV) c. Which investment opportunities should be accepted based on the NPV analysis? Briefly explain why? (3 marks) d. What is the Net Present Value? Briefly explain this capital budgeting tool for the full mark (8 marks)
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