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    Answer to student's question about: Capital Budgeting

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    A firm with a 14 percent WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:
    0 1 2 3 4 5
    Project A -6,000 2,000 2,000 2,000 2,000 2,000
    Project B -18,000 5,600 5,600 5,600 5,600 5,600

    a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.
    b. Assuming the projects are independent, which one or ones would you recommend?
    c. If the projects are mutually exclusive, which would you recommend?

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    Solution Preview

    Please see the attachment.

    0 1 2 3 4 5
    Project A -6,000 2,000 2,000 2,000 2,000 2,000
    Project B -18,000 5,600 5,600 5,600 5,600 5,600

    a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.

    Payback is the time taken to recover the initial investment. Payback period for A is 6,000/2,000=3 years
    Payback period for B is 18,000/5,600=3.21 years
    In discounted payback we use the discounted ...

    Solution Summary

    The solution explains the calculation of NPV, IRR, MIRR, payback, discounted payback and project acceptance/rejection.

    $2.19

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