Capital Budgeting

It's time to decide how to use the money your firm is expected to make this year. Two investment opportunities are available, with net cash flows as follows:

Year Project X Project Y

0 (Now) ($20,000) ($20,000)

1 8,500 4,200

2 7,000 5,700

3 5,500 7,200

4 4,000 8,700

a. Calculate each project's Net Present Value (NPV), assuming your firm's weighted average cost of capital (WACC) is 7%

b. Calculate each project's Internal rate of Return (IRR).

c. Plot NPV profiles for both projects on a graph).

d. Assuming that your firm's WACC is 7%:

(1) If the projects are independent which one(s) should be accepted?

(2) If the projects are mutually exclusive which one(s) should be accepted?


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