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The Mayfair Distribution Co. is evaluating two new distribution centers. The cash flows for the two centers are shown below in millions of dollars: Year
The Mayfair Distribution Co. is evaluating two new distribution centers. The cash flows for the two centers are shown below in millions of dollars: Year Center A Center B 0 -$100 -$100 1 20 52 2 55 52 3 90 52 a. Calculate the payback period for the two centers. If the centers are independent and the firm's payback criterion is 3 years, what decision should Mayfair make? What if the centers are mutually exclusive? Answer the last two questions using the discounted payback period. Assume the required return is 10%. b. Calculate the NPV for the two centers assuming the required rate of retum is 10%. If the centers are independent, what decision should Mayfair make? What if the centers are mutually exclusive? Would your answers change if the required return was 15%? Calculate the NPV of each alternative under each of the following required rates of return: 0%, 5%, 10%, 15%, 20%, 25%, and 30%. Graph the NPV profiles of each alternative. What is the approximate crossover rate? Why do the profiles have the slope you drew? c. d. Calculate the IRR for the two centers. If the centers are independent and the firm's required rate of return is 10%, what decision should Mayfair make? What if the centers are mutually exclusive? Answer the last two questions assuming the required return was 20%. Locate the IRRs on your NPV profiles. When a project has a positive NPV and conventional cash flows, what do we know about its IRR? Explain f. When the project's IRR is greater than the firm's cost of capital, what do we know about the project's NPV? Explain. DLL Protected View - Saved to this PC- Search 25 Mailings Review View Help the project's NPV? Explain. Under what circumstances will the NPV and IRR criteria rank the two projects differently? How should we make our decision when the ranks are different? Why? Explain the reinvestment rate assumption. h Calculate the MIRR for the two centers. If the centers are independent and the firm's required rate of return is 10%, what decision should Mayfair make? What if the centers are mutually exclusive? DLL
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