Reference no: EM133050794
Question - Your boss just handed you the estimated cash flows for two proposed projects.
Project L involves adding a new item to the firm's fabric line. This would take some time to build this product.
Project S involves an add-on to an existing line, its cash flows would decrease over time.
Both projects have 3 lives because the firm is planning on introducing an entirely new fabric line at that time.
Net cash flows estimate (in thousand dollars)
Expected Cash flows
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Year
|
Proj. L
|
Proj. S
|
|
0
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$(100)
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$(100)
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|
1
|
10
|
70
|
|
2
|
60
|
50
|
|
3
|
80
|
20
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CFO made subjective risk assessments of each project. Both projects have risk characteristics that are similar to the firm's average project. The required rate of return is 10%.
You must determine whether one or both projects should be accepted.
a. What is capital budgeting?
b. What is the difference between independent and mutually exclusive projects?
c. (1) What is the payback period? Find traditional payback periods for both Proj. L and Proj. S.
(2) What is the difference between traditional payback and discounted payback? What is each project's discounted payback?
(3) What are the main disadvantages of traditional payback? Explain which project has the better payback period.
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