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18 May, 06:31

Your company is considering an investment in one of two mutually exclusive projects. Project one involves a labor-intensive production process. Initial outlay for Project 1 is $1,495 with expected after tax cash flows of $500 per year in years 1-5. Project two involves a capital intensive process, requiring an initial outlay of $6,704. After tax cash flows for Project 2 are expected to be $2,000 per year for years 1-5. Your firm's discount rate is 10%. If your company is not subject to capital rationing, which project (s) should you take on?

Select one:

a. Project 2

b. Projects 1 and 2

c. Neither project is acceptable

d. Project 1

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Answers (1)
  1. 18 May, 06:50
    0
    Project 1 and 2

    Explanation:

    To determine which project to take on, the Net Present value is calculated using the financial calculator

    For project 1,

    Cash flow for year 0 = $-1495

    Cash flow from year 1 - 5 = $500

    Discount rate = 10%

    NPv = $400.39

    For project 2,

    Cash flow for year 0 = $-6704

    Cash flow from year 1 - 5 = $2,000

    Discount rate = 10%

    NPV = $877.57

    Project 1 and 2 should be undertaken since they both have positive NPVs and there's no capital rationing.
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