Answered: Calculate the Internal Rate of Return…

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 2CMA: Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of...

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Sun Seekers Ltd. is looking to expand its resort business and currently has quotes from two providers with the initial costs and estimated cash flows to the firm and other sundry characteristics for the projects detailed below:

	Project 1	Project 2
Initial cost	$780,000	$1,100,000
Expected cash flow to the firm	$200,000	$320,000
Life of the projects (years)	5	6

PP has a cost of capital of 9%. The projects are mutually exclusive due to capital rationing.

Note: The cash flows to the firm are after tax and depreciation.

Calculate the Internal Rate of Return (IRR), Profitability Index (PI) and payback period for both projects.

Based solely on your calculations in a) above, identify which project you would recommend to Sun Seekers Ltd.

Can NPV be used to rank the projects? If not, what should you do? Explain fully (using calculations) which project should be chosen?

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