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The R.M. Company uses the following risk-adjusted discount rates for capital budgeting purposes: Investments in new product lines 15% Substitution of labour with capital (machinery)
The R.M. Company uses the following risk-adjusted discount rates for capital budgeting purposes: Investments in new product lines 15% Substitution of labour with capital (machinery) 11% Expansion of existing product lines 13% Replacement of existing equipment 9% The firm has $1,000,000 of available capital for investment Project X involves the production of a brand new product line. Project Y involves the replacement of existing machinery. Project Z involves the purchase of a more sophisticated piece of equipment as a replacement for existing machinery This more sophisticated machine will enable R.M. Company to reduce the size of its workforce. There are no other projects available at this time. Expected cash flows for these independent projects are as follows: Projects Y Z (in thousands of dollars) 800 1,000 200 Investment (today) Net after-tax cash inflows Year 1 Year 2 Year 3 Year 4 320 300 280 260 260 300 360 60 80 100 120 420 Which project(s) would you recommend the company undertake? Show your calculations and provide any necessary explanations. (4 marks)
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