Question: Nicholson Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of $150,000. The company's board of directors has set a
| Nicholson Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of $150,000. The company's board of directors has set a maximum 4-year payback requirement and has set is cost of capital at 9%. The cash inflows associated with the two projects are | ||||||||||
| show in the table below. | ||||||||||
| Cash Inflows (Cft) | ||||||||||
| Year | Project A | Project B | ||||||||
| 1 | $45,000 | $30,000 | ||||||||
| 2 | $45,000 | $30,000 | ||||||||
| 3 | $45,000 | $30,000 | ||||||||
| 4 | $45,000 | $30,000 | ||||||||
| 5 | $45,000 | $30,000 | ||||||||
| 6 | $45,000 | $30,000 | ||||||||
| a | calculate the payback period for each project | |||||||||
| b | calculate the NPV of each project at 0% using the following formula: NPV = CF(PVIFAr,t) - CFo | |||||||||
| c | calculate the npv of each project at 9% using the following formula: NPV = CF(PVIFAr,t) - CFo | |||||||||
| d | derive the IRR of each project using the following formula: IRR = 0 = CF(PVIFAr,t) - CFo | |||||||||
| e | rank the projects by each of the techniques used. Make and justify a recommendation. | |||||||||
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