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You have to pick between three mutually exclusive projects with the following cash flows to the firm:

Question:

You have to pick between three mutually exclusive projects with the following cash flows to the firm:
You have to pick between three mutually exclusive projects with

The cost of capital is 12%.
a. Which project would you pick using the NPV rule?
b. Which project would you pick using the IRR rule?
c. How would you explain the differences between the two rules? Which one would you rely on to make your choice?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Year Project C Project A $10,000 $8,000 $7,000 Project B $5,000 $5,000 -$8,000 $15,000 $10,000 $10,000

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Year A B C 0 10000 5000 15000 1 8000 5000 10000 2 7000 8000 10000 B is the best project on a NPV ...View the full answer


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Applied Corporate Finance

Applied Corporate Finance

ISBN: 978-1118808931

4th edition

Authors: Aswath Damodaran

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Related Video

NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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