Maxima Co. is considering two independent projects, S and L, whose costs, cash inflows and the...
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Maxima Co. is considering two independent projects, S and L, whose costs, cash inflows and the internal rate of return (IRR) of the two projects are as follows: (Unit:£1,000) Year 0 Year 1 Year 2 Year 3 IRR Project S £700 £500 £300 £100 18.0% Project L -£700 £100 £300 600 15.6 % The two projects S and L are equally risky, and their cost of capital is 10%. Show your working. Required: a) Calculate the payback period (PP), discounted payback period (DPP), net present value (NPV) and profitability index (PI) of each project. marks] b) Based on the PP criterion, what project should be selected? Give a reason to justify your answer. marks] Based on the NPV criterion, what project should be selected? Give a reason to justify your answer. [4 marks] d) Based on the PI criterion, what project should be selected? Give a reason to justify your answer. marks] e) Using the linear interpolation method, calculate the internal rate of return (IRR) of Project L. Assume that the two guesses for the IRR are 15% and 16% respectively. State whether the IRR of Project L at 15.6% provided in the above table is correct or not. Maxima Co. is considering two independent projects, S and L, whose costs, cash inflows and the internal rate of return (IRR) of the two projects are as follows: (Unit:£1,000) Year 0 Year 1 Year 2 Year 3 IRR Project S £700 £500 £300 £100 18.0% Project L -£700 £100 £300 600 15.6 % The two projects S and L are equally risky, and their cost of capital is 10%. Show your working. Required: a) Calculate the payback period (PP), discounted payback period (DPP), net present value (NPV) and profitability index (PI) of each project. marks] b) Based on the PP criterion, what project should be selected? Give a reason to justify your answer. marks] Based on the NPV criterion, what project should be selected? Give a reason to justify your answer. [4 marks] d) Based on the PI criterion, what project should be selected? Give a reason to justify your answer. marks] e) Using the linear interpolation method, calculate the internal rate of return (IRR) of Project L. Assume that the two guesses for the IRR are 15% and 16% respectively. State whether the IRR of Project L at 15.6% provided in the above table is correct or not.
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a Calculate the payback period PP discounted payback period DPP net present value NPV and profitabil... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
Posted Date:
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