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Al-Ali’s firm is considering two projects and the cash flows associated with them are shown in the following table. The firm has set its cost of capital at 11 %
Year |
Project A |
Project B |
0 |
- SR 200 |
- SR 200 |
1 |
80 |
100 |
2 |
80 |
100 |
3 |
80 |
100 |
4 |
80 |
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1- What is the payback period (PBP) for each project?
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Project A |
Project B |
Payback period (PBP) |
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2- Calculate the NPV for each project?
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Project A |
Project B |
NPV |
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3- What is the
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Project A |
Project B |
IRR |
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Compute the Profitability Index (PI) for each project?
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Project A |
Project B |
Profitability Index (PI) |
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5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer:
Points |
Investment Criteria |
If A and B are mutually exclusive, then I would select |
If A and B are independent, then I would select |
PBP |
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PI |
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Compute the Profitability Index (PI) for each project?
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Project A |
Project B |
Profitability Index (PI) |
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5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer:
Points |
Investment Criteria |
If A and B are mutually exclusive, then I would select |
If A and B are independent, then I would select |
PBP |
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PI |
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- You are choosing between two projects. The cash flows for the projects are given in the following table ($ million): Project Year 0 Year 1 Year 2 Year 3 Year 4 - $51 - $102 $25 $19 $18 $40 $21 $48 $14 $59 A В a. What are the IRRS of the two projects? b. If your discount rate is 5.3%, what are the NPVS of the two projects? c. Why do IRR and NPV rank the two projects differently? a. What are the IRRS of the two projects? The IRR for project A is %. (Round to one decimal place.) The IRR for project B is %. (Round to one decimal place.) b. If your discount rate is 5.3%, what are the NPVS of the two projects? If your discount rate is 5.3%, the NPV for project A is $ million. (Round to two decimal places.) If your discount rate is 5.3%, the NPV for project B is $ million. (Round to two decimal places.) c. Why do IRR and NPV rank the two projects differently? (Select from the drop-down menus.) NPV and IRR rank the two projects differently because they are measuring different things. is…arrow_forwardFB Company is considering investing in two construction projects, and he developed the following estimates of the cash flows. His required return is 10% and views these projects as equally risky. Year Project 1 cash flow project 2 cash flow 0 -550000 -700000 1 150000 200000 2 200000 150000 3 150000 250000 4 150000 150000 5 100000 150000 Required: a) Calculate the net present value (NPV) of each project, assess its acceptability, and indicate which project is best using NPV. b) Calculate the profitability index (PI) of each project, assess its acceptability, and indicate which project is best using PI. c) If both the projects have recorded a positive NPV value and the projects are mutually exclusive, which projects would you recommend for FB Company to undertake? Why?arrow_forwardThe following are two projects a firm is considering: Project B Cash Flow Year 0 1 2 3 4 $2,939.01 Assuming that the relevant cost of capital for both projects is 11%, you should be able to determine the net present value (NPV) and the internal rate of return (IRR) for both project. Assume now that the firm has capital rationing, but knows that its true reinvestment rate is 20%, while its cost of capital is 11 percent. Given this information, determine the modified net present value (MNPV) for Project B. O $2.479.00 O $2.965.10 O$3.479.89 Project A Cash Flow O $4,084.05 ($10,000.00) ($11,000.00) $3,000.00 $5,000.00 $4,000.00 $4,000 00 $5,000.00 $4,000.00 $2,000.00 $2,000.00arrow_forward
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