Now assume that we have another project, Y, mutually exclusive with X requiring the same rate of
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- Now assume that we have another project, Y, mutually exclusive with X requiring the same rate of return with the following cash flows: initial outlay $20 million, expected cash flows for the next four years: $10.80 million, $6.80 million, $4.30 million, and $7.20 million respectively.
- Calculate the IRR of Project, Y. Compare to the IRR of Project, X. Which project is better using the IRR criterion?
- Calculate the NPV of Project, Y. Compare to the NPV of Project, X. Which project is better using the NPV criterion?
- Calculate the cross-over rate of the two projects.
- If we assume that the RRR on the two projects is below the rate calculated in part, c above, would the IRR be a proper decision criterion? Why or why not?
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