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Questions 1. What is the payback period? How is it calculated? 2. What weaknesses are commonly associated with the use of the payback period to
Questions 1. What is the payback period? How is it calculated? 2. What weaknesses are commonly associated with the use of the payback period to evaluate a proposed investment? 3. How is the net present value (NPV) calculated for a project with a conventional cash flow pattern? And What are the acceptance criteria for NPV? 4. What is the internal rate of return (IRR) on an investment? How is it determined? 5. 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 the following table. The firm's cost of capital is 14%. Project M Project N CFO $28.500 $27.000 t CFt 1 $ 10.000 $ 11.000 2 10.000 10.000 3 10.000 9.000 4 10.000 8.000 a. Calculate each project's payback period. b. Calculate the net present value (NPV) for each project. c. Calculate the internal rate of return (IRR) for each project. d. Summarize the preferences dictated by each measure you calculated, and indicate which project you would recommend. Explain why. e. Draw the net present value profiles for these projects on the same set of axes, and explain the circumstances under which a conflict in rankings might exist
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