Consider the following two mutually exclusive projects: Whichever project you choose, if any, you require a return
Question:
Consider the following two mutually exclusive projects:
Whichever project you choose, if any, you require a return of 13 percent on your investment.
a. If you apply the payback criterion, which investment will you choose? Why?
b. If you apply the NPV criterion, which investment will you choose? Why?
c. If you apply the IRR criterion, which investment will you choose? Why?
d. If you apply the profitability index criterion, which investment will you choose? Why?
e. Based on your answers in parts (a) through (d), which project will you finally choose? Why?
YearCash Flow (A) Cash Flow (B) $235,000 29,000 45,000 51,000 325,000 0 -$47,000 28,700 19,900 17,300 16,200
Step by Step Answer:
Input area Annual cash flows A B Year 0 365000 40000 Year 1 38000 2...View the full answer
Essentials of Corporate Finance
ISBN: 978-1259277214
9th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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