Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
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Chapter 11, Problem 11P

CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs $15,000, and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $37,500, and its expected cash flow’s would be $11,100 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend? Explain.

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Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

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  • CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs 17,000, and its expected cash flows would be 5,000 per year for 5 years. Mutually exclusive Project L costs 30,000, and its expected cash flows would be 8,750 per year for 5 years. If both projects have a WACC of 12%, which project would you recommend? Explain.
    Cash payback period for a service company Janes Clothing Inc. is evaluating two capital investment proposals for a retail outlet, each requiring an investment of 975,000 and each with a seven-year life and expected total net cash flows of 1,050,000. Location 1 is expected to provide equal annual net cash flows of 150,000, and Location 2 is expected to have the following unequal annual net cash flows: Determine the cash payback period for both location proposals.
    The Ulmer Uranium Company is deciding whether or not to open a strip mine whose net cost is $4.4 million. Net cash inflows are expected to be $27.7 million, all coming at the end of Year 1. The land must be returned to its natural state at a cost of $25 million, payable at the end of Year 2. Plot the project’s NPV profile. Should the project be accepted if r = 8%? If r = 14%? Explain your reasoning. Can you think of some other capital budgeting situations in which negative cash flows during or at the end of the project’s life might lead to multiple IRRs? What is the project’s MIRR at r = 8%? At r = 14%? Does the MIRR method lead to the same accept-reject decision as the NPV method?
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