Question: You are considering two mutually-exclusive projects: Project A and Project B. The initial cash outlay (cost) associated with Project A is $60,000, whereas the initial
You are considering two mutually-exclusive projects: Project A and Project B. The initial cash outlay (cost) associated with Project A is $60,000, whereas the initial cash outlay associated with Project B is $80,000. The required rate of return for both projects is 10%. The expected annual free cash flows from each project are as follows:
| Year | Project A | Project B |
|
| 0 | - 60,000 | -80,000 |
|
| 1 | 13,000 | 15,000 |
|
| 2 | 13,000 | 15,000 |
|
| 3 | 13,000 | 15,000 |
|
| 4 | 13,000 | 15,000 |
|
| 5 | 13,000 | 15,000 |
|
| 6 | 13,000 | 15,000 |
|
|
| |||
A. Calculate the payback period for each project.
B. Calculate the NPV and the IRR for each project. Which project (if any) should be accepted if they are mutually exclusive? Explain your answer.
C. What are the implications for a firm that selects the wrong project?
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