Reference no: EM132524620
project x
cost of capital 10%
initial investment $100000
cash inflow year 1 $50000
cash inflow year 2 $60000
cash inflow year 3 $20000
project y
cost of capital 12%
initial investment $150000
cash inflow year 1 $50000
cash inflow year 2 $50000
cash inflow year 3 $90000
NB Both projects are mutually exclusive
Calculate:
A. The payback period of both projects
B. The net present value of both projects
C. The profitability index of both project
D. Make recommendations on which project
Question 1: A project involves initial expenditure of $120 000 .The annual net receipts for each of the first five years are estimated to be $32 000. The companies cost of capital is 10%. Determine the following:
i. The Payback period for the project
ii. The Net Present value of the project
iii. The Internal rate of return using discount rates of 10% and 14%.
iv. Whether the project should be accepted. Give reasons for your answer.
Question 2: What is meant by the time value of money? What relevance does it have in capital investment decisions?
Question 3: Describe TWO (2) advantages and ONE (1) disadvantage of the Net Present value method of capital budgeting when compared to the payback period method.
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