Question: Evaluate the following projects, using the net present value criteria. Assume a cost of capital of 9%. Project M Project N Initial Cash Outflow -$260,000
Evaluate the following projects, using the net present value criteria. Assume a cost of capital of 9%.
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| Project M | Project N |
| Initial Cash Outflow | -$260,000 | -$260,000 |
| Year 1 Cash flow | 19,000 | 185,000 |
| Year 2 Cash flow | 121,000 | 85,000 |
| Year 3 Cash flow | 185,000 | 55,000 |
| a. | What are the NPVs for the projects and what do these numbers tell you? |
| b. | If the projects are independent, which would you accept according to the NPV criterion? |
| c. | If the projects are mutually exclusive, which would you accept according to the NPV criterion? |
| d. | Both projects have in total $325,000 of cash inflows and the same initial cash outflow. Why don't both projects have the same NPV? |
| e. | If the cost of capital increased to 12%, what impact would this have on your decision? |
| f. | Why does a change in the cost of capital have an impact on the NPV? |
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