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1. Ahmed is considering two independent projects with the following cash flows. The required return for both projects is 12%. Given this information, which one of the following statements is correct?
Year project A project B
0 -950,000 -125,000
1 370,000 65,000
2 400,000 55,000
3 450,000 50,000
a. Which project should be accepted on the basis of IRR?
b. Which project should be accepted on the basis of NPV?
c. Which project should be accepted on the basis of PI? Projected cash flow analysis.
d. Which project should be accepted on the basis of payback period? Management’s target payback period is 2.5 years.
e. Which is the best project according to you and why? At what cost of capital the conflict between NPV and IRR will disappear? Justify on the basis of incremental cash flow analysis.
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