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The Simpson Corporation is trying to choose between the following two mutually exclusive design projects: a. If

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The Simpson Corporation is trying to choose between the following two mutually exclusive design projects:

Year Cash Flow (I) Cash Flow (II) -$75,000 -$42,000 1 39,000 24,000 2 39,000 24,000 3 39,000 24,000

a. If the required return for both projects is 10 percent and the company applies the profitability index decision rule, which project should the firm accept?

b. If the company applies the NPV decision rule, which project should it choose?

c. Explain why your answers in (a) and (b) are different.

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Year Cash Flow (I) Cash Flow (II) -$75,000 -$42,000 1 39,000 24,000 2 39,000 24,000 3 39,000 24,000

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a The profitability index is the PV of the future cash flows divided by the initial inv...View the full answer


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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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