Question: Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13 percent. The cash flows for each project are shown in the given table.
|
|
Project A
|
Project B
|
|
Initial investment(CF0)
|
$80,000
|
$50,000
|
|
Year(r)
|
Cash flows (CF)
|
|
1
|
$15,000
|
$15,000
|
|
2
|
20,000
|
15,000
|
|
3
|
25,000
|
15,000
|
|
4
|
30,000
|
15,000
|
|
5
|
35,000
|
25,000
|
[A] Compute each project's payback period.
[B] Compute the net present value (NPV) for each project.
[C] Compute the internal rate of return (IRR) for each project.
[D] Make net present value profile for both projects and the same set of axes and discuss any conflict in ranking that may exist between NPV and IRR.
[E] Summarize the preference dictated by each measure, & indicate which project you would recommend. Explain your answer.