question3 .4

Question 10 Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects, M and N. The relevant cash flows for each project are shown in Table 2 below. Table 2: Cash flows for Projects M and N Project M Project N Initial Investment (CF) E28,500 $27,000 Year (t) Expected annual net profit (loss) E10,000 E1 1,000 2 E10,000 E10,000 E10,000 E9,000 4 (10,000 E8,000 Internal Rate of Return (IRR) 15% 16% If the firm has a required rate of return (cost of capital) of 14%, calculate the simple Payback period and Net Present Value (NPV) for each project. Summarize the preferences indicated by each measure you calculated, as well as taking into account the IRR (given), and indicate which project you would recommend. Explain your reasoning. (20 marks)