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Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects.

a. Compute the net present value of each alternative. Round the cost projections to the nearest month. Explain what happens to the answer if the probabilities of the recurring costs are incorrect and a more accurate estimate is as follows:

b. Repeat step (a) for the payback method.

c. Which method do you think provides the best source of information? Why?

What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...

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