This is a written calculation question, and you should perform the necessary calculations/working on paper. Start a new page for this question. 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.

QUESTION START

Milano Co. is considering two mutually exclusive projects with the same cost of capital of 15%. The estimated net cash flows are as follows:

a) Calculate the NPV for each project. Explain which project you would choose, if any, using the NPV criterion.

b) Calculate the payback period (PP) for each project. Give your answer in years, to 2 decimal places. Then state which project is preferable under the PP criterion.

c) Give 2 practical issues associated with the choice of cost of capital for the NPV method.

d) Give 2 reasons why investment projects may are mutually exclusive in practice.

e) Name one advantage and one disadvantage of the payback period method as compared with the IRR method.

Year 0 1 Project X -$530 $320 $250 $120 Project Y -$440 $290 $550 -$270 2 3 Year 0 1 Project X -$530 $320 $250 $120 Project Y -$440 $290 $550 -$270 2 3