Create a spreadsheet to answer the following questions: Calculate the internal rate of return (IRR) for each project. Discuss any conflict in ranking that may exist between NPV and IRR. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Juhayna Food Industries is attempting to select the best of three mutually exclusive projects.

The initial investment and after-tax cash inflows associated with these projects are shown in the following table.

Cash flow

Project A

Project B

Project C

Initial Investment

100000

120,000

130,000

Year 1 Cash Inflows 

30000

36,500

38000

Year 2 cash inflows

35000

45000

20000

Year 3 cash inflows

40000

40000

42000

Year 4 cash inflows

38000

35000

45000

Year 5 cash inflows

20000

30000

50000

  Taking into consideration that the cost of debt 7% , cost of preferred stock 12% and cost of new common stock 15%. The weight of each source of capital are long-term debt 30% , preferred stock 20% and common stock equity 50%.

payback period:

project A YEAR OF FULL RECOVERY = 3
project B full recovery=2+38500040000=2.963 YEARS
project c full recovery=3+3000045000=3.67 YEARS
NPV:

project A: 18656.93

project B: 16200.16

project C: 6736.876

Create a spreadsheet to answer the following questions:

  1. Calculate the internal rate of return (IRR) for each project.
  2. Discuss any conflict in ranking that may exist between NPV and IRR.
  3. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why
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