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Calculate the cash flows of the incremental project

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Reference no: EM132529004

Princess Manufacturing is considering two investment proposals. The first involves a quality improvement project, and the second is about an advertising campaign. The cash flows associated with each project appear below.

                                Quality Improvement Project                    Advertising Campaign

Cash Outflow                   -100,000                                           -100,000

Year 1                           10,000                                                P80,000

Year 2                            30,000                                               45,000

Year 3                          125,000                                                 10,000

Question 1: Suppose the hurdle rate of the firm is 10%. Calculate the cash flows of the "incremental project" by subtracting the cash flows of the second project from the cash flows of the first project. What is the IRR of the incremental project?

Question 2: Suppose the hurdle rate of the firm is 10%. If the two projects are mutually exclusive, which project should be chosen? What is the problem that the firm should be concerned with in making this decision?

Reference no: EM132529004

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