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Question - Lambert Manufacturing has P100,000 to invest in either ProjectA or Project B. The following data are available on these projects:
Project A
Project B
Cost of equipment needed now
P100,000
P60,000
Working capital investment needed now
P40,000
Annual cash operating inflows
P35,000
Salvage value of equipment in 6 years
P10,000
Both projects will have a useful life of six (6) years. At the end of six (6) years, the working capital investment will be released for use elsewhere. Lambert's required rate of return is 14%. The company uses the total cost approach to evaluating alternatives.
Required -
1. Compute the NPV of each project. Using this method of appraisal, which project must be chosen? Explain your answer.
2. Compute the Profitability Index of each project. Using this method of appraisal, which project must be chosen? Explain your answer.
3. Compute the IRR of each project. Using this method of appraisal, which project must be chosen? Explain your answer.
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