Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows:YearProject AProject B1$5,000,000$20,000,0002$10,000,000$10,000,0003$15,000,000$8,000,0004$20,000,000$6,000,000 a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. [Note: you are supposed to show every step of your calculation and interpret the result.]b) Evaluate the advantages and disadvantages of using the payback method in investment decisions and assess the situations where it should be used. [Note: remember to use Harvard referencing to reference your sources]

Payback period refers to the time period required for a project to recover its initial cash outflow.…

Answered: Your company is currently considering…

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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Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows:

Year	Project A	Project B
1	$5,000,000	$20,000,000
2	$10,000,000	$10,000,000
3	$15,000,000	$8,000,000
4	$20,000,000	$6,000,000

a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. [Note: you are supposed to show every step of your calculation and interpret the result.]
b) Evaluate the advantages and disadvantages of using the payback method in investment decisions and assess the situations where it should be used. [Note: remember to use Harvard referencing to reference your sources]

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