Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%. Project 1 Project 2 Initial investment $(510,000) $(685,000) Cash inflow Year 1 $485,000 $610,000 Compute the following for each project: NPV (net present value) PI (profitability index) IRR (internal rate of return)
Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%. Project 1 Project 2 Initial investment $(510,000) $(685,000) Cash inflow Year 1 $485,000 $610,000 Compute the following for each project: NPV (net present value) PI (profitability index) IRR (internal rate of return)
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
Problem 1PS
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- Connor Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required
rate of return of 12%.
|
|
Project 1 |
Project 2 |
|
Initial investment |
$(510,000) |
$(685,000) |
|
|
$485,000 |
$610,000 |
Compute the following for each project:
- NPV (
net present value ) - PI (profitability index)
- IRR (
internal rate of return )
Based on your analysis, answer the following questions :
- Which is the best choice? Why?
- Which project should be selected and why? If the projects had the same IRR amounts but different NPV totals, then how would you know which project to select? Explain.
- What would happen if both projects had negative NPV totals? Which project would you choose? What do negative NPVs indicate? Explain.
- Should we also use the payback method to assist us in project selection? Why or why not? Explain.
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