Answered: Exercice 2. You must choose one of…

Exercice 2. You must choose one of these projects. Which one do you chose and why? [5] Year 1 IRR NPV PI Project A Project B -50 80 60% 14 0.28 -120 180 50% 24 0.20

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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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Exercice 2.
You must choose one of these projects. Which one do you chose and why? [5]
Year
1
IRR
NPV
PI
Project A
Project B
-50
80
60%
14
0.28
-120
180
50%
24
0.20

Expert Solution

Step 1

In the question given,

Cost of capital = 25% (calculated based on cash inflows)

Discounting factor of 0.8 (64/80) for Year 1 is at 25%.

PI for the projects is calculated as follows: NPV/Cash outflow

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