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Use the following information for problems 1 to 5. Assume that the projects are mutually exclusive. Year Cash Flow (A) Cash Flow (B) 0 ($525,600)
Use the following information for problems 1 to 5. Assume that the projects are mutually exclusive.
Year | Cash Flow (A) | Cash Flow (B) |
0 | ($525,600) | ($425,600) |
1 | $323,100 | $235,900 |
2 | $180,200 | $163,900 |
3 | $145,000 | $135,000 |
4 | $88,220 | $79,000 |
5 | $73,699 | $65,000 |
- What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?
- If the required return is 15 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?
- Over what range of discount rates would the company choose Project A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.
- Compute the payback period for each project.
- Compute the profitability index for each project.
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