Question
You are tasked with evaluating two investment opportunities for Omega Corporation, Projects M and N. Each project requires an initial investment of $150,000, and the
You are tasked with evaluating two investment opportunities for Omega Corporation, Projects M and N. Each project requires an initial investment of $150,000, and the cost of capital is 10 percent. The projected net cash flows are detailed below:
Expected Net Cash FlowsYear | Project M | Project N |
0 | ($150,000) | ($150,000) |
1 | 90,000 | 80,000 |
2 | 50,000 | 60,000 |
3 | 30,000 | 40,000 |
4 | 20,000 | 30,000 |
i) Compute the payback period for each project.
ii) Calculate the NPV and IRR for each project.
iii) Recommend which project to accept if they are not mutually exclusive.
iv) Determine the impact on the decision if the cost of capital increases to 14 percent.
v) Explain how sensitivity analysis can be applied to these projects.
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