Question: ABC Co. is considering two mutually exclusive projects with the same cost of capital of 9%. The estimated net cash flows are as follows: a)

ABC Co. is considering two mutually exclusive projects with the same cost of capital of 9%. The estimated net cash flows are as follows: ABC Co. is considering two mutually exclusive projects with the same cost

a) Calculate the payback period for each project.

b) Calculate the NPV for each project. Explain which project you would choose using the NPV criterion.

c) Discuss two problems of using payback period in capital budgeting decisions in the context of Projects X and Y.

d) Discuss the practical issues associated with the choice of cost of capital for the NPV method.

e) Explain why the NPV method is the recommended approach among different capital budgeting measures.

Year 0 1 Project X -$500 $220 $240 $400 Project Y -$310 $280 $500 -$190 2 3

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