Question
The company that you are working in has three projects in hand which it can consider. Table 1 depicts the cash flows of these three
The company that you are working in has three projects in hand which it can consider. Table 1 depicts the cash flows of these three different projects. They are Project Alpha, Beta and Charlie. The cash flows for the next five years are provided in Table 1.
Table 1: Cash Flows of Three Different Projects
Period | Project Alpha ($) | Project Beta ($) | Project Charlie ($) |
Year 0 | (3,000) | (3,000) | (3,000) |
Year 1 | 1,500 | 1,500 | 1,500 |
Year 2 | 1,500 | 1,600 | 0 |
Year 3 | 1,500 | 1,000 | 1,500 |
Year 4 | 1,500 | 1,200 | 0 |
Year 5 | 1,500 | 1,500 | 1,800 |
The firm's cost of capital is 10 percent for each project.
The questions to be answered are:
- Calculate the payback period for each project.
- Calculate NPV for each project.
- Which are the projects that are considered as viable in accordance to the NPV rule?
- Calculate profitability index for each project.
- Calculate the IRR for each project.
- The company only has funds to finance two of the projects. Which two projects should be financed?
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