Worldwide Widget Manufacturing, Inc., wants to add two new production lines of widgets. You’re asked to analyze whether to go forward with two mutually exclu¬sive projects. The cash flows of both projects are displayed below. Your company uses a cost of capital of 9 percent to evaluate projects such as the two you’re now analyzing. Show all calculations. Year: 0 1 2 3 4 5 Project A Cash Flow –$1,000 $150 $300 $500 $300 $250 Project B Cash Flow –$1,400 $300 $470 $200 $600 $350
Calculate the payback of Project A:
Calculate the payback of Project B:
Calculate the IRR of Project A:
Calculate the IRR of Project B:
Using the NPV method and assuming a cost of capital of 6 percent, calculate the NPV of these two projects. Which of these mutually exclusive projects should the company accept?