Lake Inc is faced with several investment opportunities. The projects are mutually exclusive, and he is faced with limited capital. Consider the following cash flows relating to the projects: Year Machine A Machine B $ (120 000) $ (105 000) 40 000 30 000 50 000 45 000 35 000 30 000 42 000 25 000 20 000 20 000 The projects’ cost of capital is 12%. As a financial analyst you have been asked to perform the following task: Calculate the projects’ payback period. Calculate the projects’ Net Present Value (NPV) Make a recommendation as to which project should be undertaken and why? Briefly explain the following concepts: independent projects mutually exclusive projects unlimited funds capital rationing

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 21P: Your division is considering two investment projects, each of which requires an up-front expenditure...

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Lake Inc is faced with several investment opportunities. The projects are mutually exclusive, and he is faced with limited capital. Consider the following cash flows relating to the projects:

Year Machine A Machine B

$ (120 000) $ (105 000)
40 000 30 000
50 000 45 000
35 000 30 000
42 000 25 000
20 000 20 000

The projects’ cost of capital is 12%.

As a financial analyst you have been asked to perform the following task:

Calculate the projects’ payback period.
Calculate the projects’ Net Present Value (NPV)
Make a recommendation as to which project should be undertaken and why?
Briefly explain the following concepts:
independent projects
mutually exclusive projects
unlimited funds
capital rationing

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