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Advanced Portfolio Company Limited has identified the following two mutually exclusive projects.
Year Cash flow of project X($M) Cash flow of project Y($M)
0 -300 -300
1 50 150
2 90 120
3 120 90
4 200 50
Required:
Problem (a) Calculate the NPVs for Project X and Project Y under different discount rates of 5%, 10% and 15%, correct to 1 decimal point of million dollars.
Problem (b) What are the IRRs of Project X and Y by means of trial and error, correct to 1 decimal point of percentage? Using the IRR decision rule, which project should the company accept? (Hint: IRR of X is between 15% and 16%, and that of Y is between 16% and 17%)
Problem (c) If the required return is 12%, what is the NPV for each of these projects, correct to 1 decimal point of million dollars? Which project will the company choose if it applies the NPV decision rule?
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