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Two projects, Project M and Project N, are being evaluated by your company. Both have different cash flow patterns and a 4-year project life. Project
Two projects, Project M and Project N, are being evaluated by your company. Both have different cash flow patterns and a 4-year project life.
Project M:
- Year 0: $(180)
- Year 1: $40
- Year 2: $60
- Year 3: $80
- Year 4: $100
Project N:
- Year 0: $(160)
- Year 1: $50
- Year 2: $70
- Year 3: $90
- Year 4: $110
The company's cost of capital is 9%.
a. Describe the concept of NPV and why it is important. b. Calculate the payback period for both projects. c. Define the IRR and calculate it for both projects. d. Discuss the benefits and limitations of using IRR for project evaluation. e. Determine which project is better using NPV and IRR criteria.
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