period for each project. Based on payback period, which project is preferred? Compute net present value for each project. Based on net present value, whi

Entrepreneurial Finance
6th Edition
ISBN:9781337635653
Author:Leach
Publisher:Leach
Chapter14: Security Structures And Determining Enterprise Values
Section: Chapter Questions
Problem 9EP
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Gonzalez Co. is considering two new projects with the following net cash flows. The company’s required rate of return on investments is 10%.

  1. Compute payback period for each project. Based on payback period, which project is preferred?
  2. Compute net present value for each project. Based on net present value, which project is preferred?
Year
Initial investment
1
2
3
Net Cash Flows
Project 1
$(60,000)
30,000
30,000
5,000
Project 2
$(60,000)
35,000
20,000
20,000
Transcribed Image Text:Year Initial investment 1 2 3 Net Cash Flows Project 1 $(60,000) 30,000 30,000 5,000 Project 2 $(60,000) 35,000 20,000 20,000
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