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Problem 1: Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects-M and N. The relevant cash flows for each project are shown in the following table. The firm's cost of capital is 14%. Project M Project N Initial investment (CF) $28,500 527,000 Year () Cash inflows (CF) 1 $10,000 $11,000 10,000 10,000 2. 10,000 3. 9,000 10,000 8,000 a. Calculate each project's payback period. b. Calculate the net present value (NPV) for each project. c. Calculate the internal rate of return (IRR) for each project. d. Summarize the preferences dictated by each measure you calculated and indicate which project you would recommend. Explain why.

Problem 1: Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects-M and N. The relevant cash flows for each project are shown in the following table. The firm's cost of capital is 14%. Project M Project N Initial investment (CF) $28,500 527,000 Year () Cash inflows (CF) 1 $10,000 $11,000 10,000 10,000 2. 10,000 3. 9,000 10,000 8,000 a. Calculate each project's payback period. b. Calculate the net present value (NPV) for each project. c. Calculate the internal rate of return (IRR) for each project. d. Summarize the preferences dictated by each measure you calculated and indicate which project you would recommend. Explain why.

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter11: The Basics Of Capital Budgeting
Section: Chapter Questions
Problem 11P: CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S requires an initial outlay at t =...
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Problem 1: Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects-M and N. The relevant cash flows for each project are shown in the following table. The firm's cost of capital is 14%. Project M Project N Initial investmecnt (CF) 528,500 527,000 Year (t) Cash inflows (CF) $10,000 10,000 10,000 10,000 $11,000 2. 10,000 9,000 4. 8,000 a. Calculate each project's payback period. b. Calculate the net present value (NPV) for each project. c. Calculate the internal rate of return (IRR) for each project. d. Summarize the preferences dictated by each measure you calculated and indicate which project you would recommend. Explain why.
Transcribed Image Text:Problem 1: Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects-M and N. The relevant cash flows for each project are shown in the following table. The firm's cost of capital is 14%. Project M Project N Initial investmecnt (CF) 528,500 527,000 Year (t) Cash inflows (CF) $10,000 10,000 10,000 10,000 $11,000 2. 10,000 9,000 4. 8,000 a. Calculate each project's payback period. b. Calculate the net present value (NPV) for each project. c. Calculate the internal rate of return (IRR) for each project. d. Summarize the preferences dictated by each measure you calculated and indicate which project you would recommend. Explain why.
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