Question: *Please help - I was able to complete part A with some help, but I need help answering questions B - E. Thank you!!* Projects
*Please help - I was able to complete part A with some help, but I need help answering questions B - E. Thank you!!*
Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.
| Project A | Project B | |||||
| -$130,000.00 | -$85,000.00 | |||||
| Initial Investment (CF0) | ||||||
| Year (t) | Cash Inflows (CFt) | |||||
| 1 | $25,000 | $40,000 | ||||
| 2 | $35,000 | $35,000 | ||||
| 3 | $45,000 | $30,000 | ||||
| 4 | $50,000 | $10,000 | ||||
| 5 | $55,000 | $5,000 | ||||
Question A - Calculate each project's payback period
| Project A | Project B | ||||||||||
| Year | Cash Flow Stream | Cumulative Cash Flow | Year | Cash Flow Stream | Cumulative Cash Flow | ||||||
| 0 | -130,000 | -130,000 | 0 | -85,000 | -85,000 | ||||||
| 1 | 25,000 | -105,000 | 1 | 40,000 | -45,000 | ||||||
| 2 | 35,000 | -70,000 | 2 | 35,000 | -10,000 | ||||||
| 3 | 45,000 | -25,000 | 3 | 30,000 | 20,000 | ||||||
| 4 | 50,000 | 25,000 | 4 | 10,000 | 30,000 | ||||||
| 5 | 55,000 | 80,000 | 5 | 5,000 | 35,000 | ||||||
| Total | 80,000 | Total | 35,000 | ||||||||
| Payback period (PBP) = Numerical Value of the last year with negative cash flow + (Absolute value of that negative cash flow / Total cash flows of the next year) | |||||||||||
| Project A = 3+(25,000/50,000) | Project B = 2+(10,000/30,000) | ||||||||||
| 3.5 | 2.33 | ||||||||||
| Years is the payback period for Project A | Years is the payback period for Project B | ||||||||||
Question B - Calculate the net present value (NPV) for each project.
Question C - Calculate the internal rate of return (IRR) for each project.
Question D - Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
Question E - Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
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