Concept explainers
All techniques with NPV profile: Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.
a. Calculate each project's payback period.
b. Calculate the
c. Calculate the
d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
0 | Project A | Project B |
Initial Investment (CF0) | –$80,000 | –$50,000 |
Year(t) | ||
1 | $15,000 | $15,000 |
2 | 20,000 | 15,000 |
3 | 25,000 | 15,000 |
4 | 30,000 | 15,000 |
5 | 35,000 | 15,000 |
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Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
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