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All techniques with NPV profile- mutually exclusive projects.
Projects A and B, of equal risk. Are alternatives for expanding Rosa Company’s capacity. The firm’s cost of capital is 13%. The cash flows for each project are shown in the following table.
a. Calculate each project’s payback period.
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and include which project you would recommend. Explain why.

  • finance -

    a.Project A
    Payback period
    Year 1 + Year 2 + Year 3 = $60,000
    Year 4 + $20,000
    Initial investment = $80,000
    Payback=3 years + ($20,000 / 30,000)
    Payback =3.67 years
    Project B
    Payback period
    $50,000/ $15,000 = 3.33 years
    Project A
    CF0 = -$80,000; CF1= $15,000; CF2= $20,000; CF3= $25,000; CF4= $30,000;
    CF5 =$35,000
    Set I = 13%
    Solve for NPVA = $3,659.68
    Project B
    CF0 =-$50,000; CF1 = $15,000; F1 = 5
    Set I= 13%
    Solve for NPVB = $2,758.47
    c. Project A
    CF0=-$80,000; CF1 = $15,000; CF2= $20,000; CF3= $25,000; CF4=$30,000;
    CF5= $35,000
    Solve for IRRA= 14.61%
    Project B
    CF0=$50,000; CF1= $15,000; F1=5
    Solve for IRRB= 15.24%

    D. It's a Graph. (You must Make It)
    Data for NPV Profiles
    Discount Rate A B

    0% $45,000 $25,000
    13% $3,655 2,755
    14.6% 0 —
    15.2% — 0
    Intersection—approximately 14%
    If cost of capital is above 14%, conflicting rankings occur.
    The calculator solution is 13.87%.

    Both projects are acceptable. Both have similar payback periods, positive NPVs, and equivalent IRRs that are greater than the cost of capital. Although Project B has a slightly higher IRR, the rates are very close. Because Project A has a higher NPV, accept Project A.

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