A company is examining two mutually exclusive projects. Project P requires an immediate investment of $225,000 and

Question:

A company is examining two mutually exclusive projects. Project P requires an immediate investment of $225,000 and produces no profit until the fourth year. Then the expected annual profit is $120,000 for Years 4 to 7 inclusive. Project Q requires an investment of $225,000 now and is expected to generate an annual profit of $55,000 in Years 1 to 7. Neither project has any residual value after seven years.
a. Calculate the IRR of each project. On the basis of their IRRs, which project is preferred?
b. Which project should be selected if the firm’s is 16%?
c. Which project should be selected if the firm’s is 13%?
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...