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Question 3 Company D has a required rate of return of 10% and a capital budget of $260,000 for the coming year. It is currently
Question 3 Company D has a required rate of return of 10% and a capital budget of $260,000 for the coming year. It is currently evaluating the following two mutually exclusive projects: Net cash flow Year 0 (initial investment) Year 1 Year 2 Year 3 Year 4 Year 5 Project A ($) -260,000 96,000 92,000 89,000 85,000 76,000 Project B ($) -260,000 66,000 78,000 83,000 89,000 97,000 Required: (a) Calculate, for each project: (0) Payback (6 marks) Net present value (NPV) (7 marks) (b) Explain whether Project A or Project B would be accepted using: (0) Payback only (ii) NPV only (iii) Taking both payback and NPV results into account. (9 marks) (c) Discuss the benefits and drawbacks of using payback in capital budgeting decisions. (5 marks) (d) Company D is reviewing its internal policy on short-term finance. Describe the three main motives for a company to hold cash
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