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PLEASE ANSWER ALL QUESTIONS BY INDICATING ALL NECESSARY STEPS
- Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected? Refer to text problems, (10-10). Capital Budgeting Methods
- You have a project in mind that will be able to meet the strategic objective of your organization. While evaluating the project, you found out that the project would cost $600,000. Since you are introducing a new potential product in the market, you are very hopeful that your expected inflows will be $30,000 per quarter for the first two years and then $90,000 per quarter thereafter. What is the payback period of this project?
- Your company can accept one of three possible projects. Project A has a NPV OF $30,000, it will take 5 years to complete and the associated cost will be $10,000. Project B has NPV of $60,000,it will take 3 years to complete and the cost will be $15,000.Project C has NPV of $80,000 and it will take 4 years complete and it will cost $40,000.Based on the information, which project would you pick?
- Discuss cannibalization
- Discuss the process of cash flow estimation.
- 36 MONTHS
- 38 MONTHS
- 48 MONTHS
- 52 MONTHS
- They all have the same value
- PROJECT A
- PROJECT B
- PROJECT C
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Explanation & Answer
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Data
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Rate
NPV
IR
MIRR
PI
Project S Project L
-10000
-25000
3000
7400
3000
7400
3000
7400
3000
7400
3000
7400
0.12
0.12
$814.33 $1,675.34
15.24%
14.67%
15.24%
14.67%
8.14%
6.70%
Selection
L
S
S
S
Note: Since the project doesn't have additional cash outflows, IRR
ve additional cash outflows, IRR = MIRR
Months
0
3
6
9
12
15
18
21
24
27
30
33
36
39
42
Cash flow Cumulative cash flow Positive?
-600000
-600000 FALSE
30000
-570000 FALSE
30000
-540000 FALSE
30000
-510000 FALSE
30000
-480000 FALSE
30000
-450000 FALSE
30000
-420000 FALSE
30000
-390000 FALSE
30000
-360000 FALSE
90000
-270000 FALSE
90000
-180000 FALSE
90000
-90000 FALSE
90000
0 TRUE
90000
90000 TRUE
90000
180000 TRUE
Payback period
36 months
Data
Cost
NPV
Time
Annual PI
Project A Project B Project C
10000
15000
40000
30000
60000
80000
5
3
4
60%
133%
50%
Report: Homework set 4
Homework set 4
by HAL
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