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Computing The NPV, IRR And Discounted Payback Period

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? Two projects being considered are mutually exclusive and have the following projected cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$50,000 -$50,000
1 15,625 0
2 15,625 0
3 15,625 0
4 15,625 0
5 15,625 99,500
If the required rate of return on these projects is 10 percent, which would be chosen and why?

? Davis Corporation is faced with two independent investment opportunities. The corporation has an investment policy that requires acceptable projects to recover all costs within 3 years. The corporation uses the discounted payback method to assess potential projects and utilizes a discount rate of 10 percent. The cash flows for the two projects are:

Project A Project B

Year Cash Flow Cash Flow

0 -$100,000 -$80,000
1 40,000 50,000
2 40,000 20,000
3 40,000 30,000
4 30,000 0

In which investment project(s) should the company invest?

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Solution Summary

This solution illustrates how to compute the net present value, internal rate of return and discounted payback period of mutually exclusive projects.

See Also This Related BrainMass Solution

Capital Budgeting-payback period, discounted payback, NPV, IRR

Question 1
Assume you have just been promoted junior financial manager of a company. You are very smart and are planning to be promoted in the next 2-2.5 years. An associate of your company shows you a project with the following cash flows.

End of Year Cash Flows
0 -$100,000
1 $40,000
2 $40,000
3 $40,000
4 $40,000
5 -$20,000
6 $80,000

a) Compute the payback period of this project.

b) Compute the discounted payback period of this project assuming a discount rate of 5%.

c) Would you accept this project? Explain.

d) Compute the NPV of the project. Is this a good project?

e) Would you use the IRR as evaluation technique for this project? Explain.

Quest 2
A project has the following cash flows:

End of Year Cash Flows
0 -150,000
1 60,000
2 60,000
3 60,000
4 60,000
5 60,000
6 -50,000
7 -50,000
8 -50,000
9 -50,000
10 -50,000
A) Compute the NPV of the project assuming a discount rate of 0%
B) Compute the NPV of the project assuming a discount rate of 8.02%
C) Interpret the results in a) and b)
D)If this project's risk adjusted discount rate is 6% should the project be accepted? Explain

Question 3

The "golden rule" in capital budgeting is to select a project if the NPV of the project is positive. Would you accept a project with a negative NPV? Explain

Please see attached for full question.

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