You are a financial analyst for the Vincenzo Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each project is 12%. The projects’ expected net cash flows are as follows:Expected Net Cash FlowsYear Project X Project Y0 ($10,000) ($10,000)1 6,500 3,5002 3,000 3,5003 3,000 3,5004 1,000 3,500 Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR).Which project or projects should be accepted if they are independent?Which project should be accepted if they are mutually exclusive?How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: Plot the NPV profiles.)Why does the conflict exist?

The director of capital budgeting has asked you to analyze two proposed capital investments,…

Answered: 3,500 Calculate each project’s…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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You are a financial analyst for the Vincenzo Company. The director of capital budgeting has asked you to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each project is 12%. The projects’ expected net cash flows are as follows:

Expected Net Cash Flows

Year Project X Project Y

0 ($10,000) ($10,000)

1 6,500 3,500

2 3,000 3,500

3 3,000 3,500

4 1,000 3,500

Calculate each project’s payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR).
Which project or projects should be accepted if they are independent?
Which project should be accepted if they are mutually exclusive?
How might a change in the cost of capital produce a conflict between the NPV and IRR rankings of these two projects? Would this conflict exist if r were 5%? (Hint: Plot the NPV profiles.)
Why does the conflict exist?

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