Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive
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Question:
Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 10%.
Project 1 | Project 2 | |
Initial investment | $(465,000) | $(700,000) |
Cash inflow Year 1 | $510,000 | $850,000 |
Compute the following for each project:
- NPV (net present value)
- PI (profitability index)
- IRR (internal rate of return)
Based on your analysis, answer the following questions :
- Which is the best choice? Why?
- Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.
- What would happen if both projects had negative NPV totals? Which project would you choose? What do negative NPVs indicate? Explain.
- Should we also use the payback method to assist us in project selection? Why or why not? Explain.
Related Book For
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty
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