On November 10, 2022, the total market value of company “BellaLimited” is $49 million dollars. In the beginning of the year, the company issued a ten-year bond with a coupon rate of 12% that iscurrently trading at 1,125 dollars. The market ongoing rate ofinterest/discount rate is 8%. The CEO of the company isconsidering undertaking two solar projects namely, project“Lambda” that has a cost of $15,000 and is expected to producebenefits (e.g., cash flows) of $5,000 per year for five years andproject “EPSILON” that costs $24,000 and is expected to produce cash flows of $6,500 per year for five years.   a. Calculate the two projects Internal Rate of Return and ProfitabilityIndices. b. Which project would be selected, assuming that are MutuallyExclusive, using each ranking method? c. Discuss in detail the advantages and disadvantages of the IRRcriterion.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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On November 10, 2022, the total market value of company “BellaLimited” is $49 million dollars. In the beginning of the year, the company issued a ten-year bond with a coupon rate of 12% that iscurrently trading at 1,125 dollars. The market ongoing rate ofinterest/discount rate is 8%. The CEO of the company isconsidering undertaking two solar projects namely, project“Lambda” that has a cost of $15,000 and is expected to producebenefits (e.g., cash flows) of $5,000 per year for five years andproject “EPSILON” that costs $24,000 and is expected to produce cash flows of $6,500 per year for five years.

 

a. Calculate the two projects Internal Rate of Return and ProfitabilityIndices.
b. Which project would be selected, assuming that are MutuallyExclusive, using each ranking method?
c. Discuss in detail the advantages and disadvantages of the IRRcriterion.
d. Which ranking criterion is better IRR or NPV? Carefully explainyour answer.
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