Reference no: EM132645736
You are a financial analyst for the Waffle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects A and B. Each project has a cost of $50,000, and the cost of capital for each is 10%.
The projects' expected net cash flows are as follows:
Expected Net Cash Flows
Year Project A Project B
0 ($50,000) ($50,000)
1 25,000 15,000
2 20,000 15,000
3 10,000 15,000
4 5,000 15,000
5 5,000 15,000
Problem 1: Calculate each project's payback period, net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
Problem 2: Which project will you select if your decision was based solely on the project's payback period?
Problem 3: Which project or projects should be accepted if they are independent?
Problem 4: Which project should be accepted if they are mutually exclusive?
Problem 5: How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 6%? (Hint: Plot the NPV profiles.)
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