Question: P1028 ALL TECHNIQUES WITH NPV PROFILE: MUTUALLY EXCLUSIVE PROJECTS Projects A and B are alternatives for expanding Rosa Companys capacity. The firms cost of capital
P1028 ALL TECHNIQUES WITH NPV PROFILE: MUTUALLY EXCLUSIVE PROJECTS Projects A and B are alternatives for expanding Rosa Companys capacity. The firms cost of capital is 13%. The cash flows for each project are shown in the following table.
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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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Draw the NPV profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
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Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
| Project A | Project B | |
|---|---|---|
| Initial investment (CF0) | $80,000 | $50,000 |
| Year (t) | Cash inflows (CFt) | |
| 1 | $15,000 | $15,000 |
| 2 | 20,000 | 15,000 |
| 3 | 25,000 | 15,000 |
| 4 | 30,000 | 15,000 |
| 5 | 35,000 | 15,000 |
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