Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%. Project 1Project 2Initial investment$(684,000)$(585,000)Cash inflow Year 1$275,000$380,000Compute the following:NPV (net present value)PI (profitability index)IRR (internal rate of return)Based on your analysis, answer the following questions: Which is the best choice? Why?Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.What would happen if both projects had negative NPV totals? Which project would you choose? What do negative NPVs indicate? Explain.Should we also use the payback method to assist us in project selection? Why or why not? Explain.

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Answered: Connor Corporation is considering two…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 13P

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Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%.

	Project 1	Project 2
Initial investment	$(684,000)	$(585,000)
Cash inflow Year 1	$275,000	$380,000

Compute the following:

NPV (net present value)
PI (profitability index)
IRR (internal rate of return)

Based on your analysis, answer the following questions:

Which is the best choice? Why?
Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.

What would happen if both projects had negative NPV totals? Which project would you choose? What do negative NPVs indicate? Explain.
Should we also use the payback method to assist us in project selection? Why or why not? Explain.

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