Question
You are a financial analyst for Damon Electronics Company. The director of capital budgeting has asked you to analyze two proposed capital investments, project X
You are a financial analyst for Damon Electronics Company. The director of capital budgeting has asked you to analyze two proposed capital investments, project X and project Y. Each project has a cost of $10,000, and the cost of capital for each project is 12%. The projects expected net cash flows are as follows:
Project X Project Y
Period Cash flows Cash flows
0 $10,000 $10,000
1 6,500 1,000
2 3,000 1,000
3 3,000 7,000
4 1,000 7,000
A. | Y, because it has higher IRR, which is also higher than the cost of capital, 12 percent. | |
B. | X, because it has higher IRR, which is also higher than the cost of capital, 12 percent. | |
C. | X, because it has higher NPV, which is also positive. | |
D. | Both, because both projects have positive NPV and their IRRs are both higher than cost of capital, 12 percent. | |
E. | Y, because it has higher NPV, which is also positive. |
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