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STU Inc. is evaluating two projects, each requiring an initial investment of 50,000 and a life of 4 years. The companys required rate of return
STU Inc. is evaluating two projects, each requiring an initial investment of ₹50,000 and a life of 4 years. The company’s required rate of return is 15%. The projects will be depreciated on a straight-line basis. The net cash flows (before taxes) expected to be generated by the projects and the present value (PV) factor (at 15%) are as follows:
Year | 1 | 2 | 3 | 4 |
Project M (₹) | 15,000 | 15,000 | 15,000 | 15,000 |
Project N (₹) | 20,000 | 10,000 | 8,000 | 12,000 |
PV factor (at 15%) | 0.870 | 0.756 | 0.658 | 0.572 |
Requirements:
- Calculate the NPV of each project.
- Determine the IRR for each project.
- Calculate the payback period for each project.
- Assess the profitability index for each project.
- Recommend which project to undertake based on the above analysis.
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