QUESTION 2

For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places.. If any parts of the question use values from earlier parts, use the EXACT values from earlier parts.

XYZ Co. is considering two mutually exclusive projects with the same cost of capital of 13%.

The estimated net cash flows are as follows:

a) Calculate the NPV for each project. Explain which project you would choose using the NPV criterion if you are only allowed to choose (up to) one. (2 marks)

b) Give 2 reasons why you would prefer using the NPV method over the IRR method when deciding between Project X and Project Y above. (2 marks)

c) Calculate the payback period for each project. (2 marks)

d) Discuss two problems of using payback period in capital budgeting decisions. (2 marks)

e) Explain why the NPV method is the recommended approach among different capital budgeting measures. (2 marks)

Year 0 1 Project X -$450 $250 $250 $315 Project Y -$300 $260 $550 -$300 2 3