Question: Chapter 10 End of Chapter Problems ST101 All techniques with NPV profile: Mutually exclusive projects Fitch Industries is in the process of choosing the better
Chapter 10 End of Chapter Problems
ST101 All techniques with NPV profile: Mutually exclusive projects Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects, M and N. The relevant cash flows for each project are shown in the following table. The firms cost of capital is 9%.
| Project M | Project N | |
|---|---|---|
| Initial investment (CF0) | $40,000 | $40,000 |
| Year (t) | Cash inflows (CFt) | |
| 1 | $14,000 | $23,000 |
| 2 | 14,000 | 12,000 |
| 3 | 14,000 | 10,000 |
| 4 | 14,000 | 9,000 |
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Calculate each projects payback period.
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Calculate the net present value (NPV) for each project.
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Calculate the internal rate of return (IRR) for each project.
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Summarize the preferences dictated by each measure you calculated, and indicate which project you would recommend. Explain why.
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Draw the net present value profiles for these projects on the same set of axes, and explain the circumstances under which a conflict in rankings might exist.
Principles of Managerial Finance Chad J. Zutter; Scott B. Smart
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