You are a financial analyst for Monument Properties and are asked by your boss to analyze two proposed capital investments with the same initial investment of 100K, Projects X and Y. Project X is somewhat boring having regular cash flow of 49K for each of the next 5 years. Project Y has cash flows of 10k each in years two and three, followed by a big payoff in years four and five of 100K and 175K, respectively. The VP of Finance lets you know that cost of capital is 13.5%.
a) Calculate NPV for each project.
b) Calculate internal rate of return as your boss likes a percentage.
c) Calculate the payback period for the VP of Sales.
d) Which project(s) should be accepted if they are independent?
e) Which project(s) should be accepted if they are mutually exclusive?
f) Oops! Why did you believe the VP of Finance? The CFO believes the cost of capital is probably 6%. Calculate NPV with this rate and see if it affects your recommendations for independent projects.
g) Better to be thorough and see if lower cost of capital affects your choice with mutually exclusive projects also.