Question: A firm is evaluating two mutually exclusive projects, A and B, with the following cash flows: Initial outlay: $6,000 Project A: $2,500 annually for 3

A firm is evaluating two mutually exclusive projects, A and B, with the following cash flows:

  • Initial outlay: $6,000
  • Project A: $2,500 annually for 3 years
  • Project B: $2,000 annually for 4 years

The discount rate is 12%.

Requirements:

  1. Calculate the payback period for each project.
  2. Compute the NPV for both projects.
  3. Determine which project should be accepted based on NPV.
  4. Analyze the effect of changing the discount rate to 15%.

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