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Question - Lake Inc is faced with several investment opportunities. The projects are mutually exclusive, and he is faced with limited capital. Consider the following cash flows relating to the projects: Year Machine A Machine B 0 $ (120 000) $ (105 000) 1 40 000 30 000 2 50 000 45 000 3 35 000 30 000 4 42 000 25 000 5 20 000 20 000 The projects' cost of capital is 12%.
A. As a financial analyst you have been asked to perform the following task:
i. Calculate the projects' payback period.
ii. Calculate the projects' Net Present Value (NPV)
iii. Make a recommendation as to which project should be undertaken and why?
B. Briefly explain the following concepts: i. independent projects ii. mutually exclusive projects iii. unlimited funds iv. capital rationing.
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