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Company K is considering two mutually exclusive projects. The cash flows outlay and incomes of the projects are:
Year Project A Project B
Initial Outlay -$2,000,000 -$2,000,000
1 400,000
2 400,000
3 400,000
4 400,000
5 400,000
6 400,000
7 400,000 4,250,000
a. Compute the payback period for each project.
b. Compute the NPV for each project, assuming a 13% required rate of return.
c. Compute the Profitability Index for each project, assuming a 13% required rate of return.
d. Fully explaining your logic, assuming you ARE going to invest in one of these two projects, how would you decide between the two projects?
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