Problem 1: Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects-M and N. The relevant cash flows for each project are shown in the following table. The firm's cost of capital is 14%. Project M Project N Initial investment (CF) $28,500 527,000 Year () Cash inflows (CF) 1 $10,000 $11,000 10,000 10,000 2. 10,000 3. 9,000 10,000 8,000 a. Calculate each project's payback period. b. Calculate the net present value (NPV) for each project. c. Calculate the internal rate of return (IRR) for each project. d. Summarize the preferences dictated by each measure you calculated and indicate which project you would recommend. Explain why.
Problem 1: Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects-M and N. The relevant cash flows for each project are shown in the following table. The firm's cost of capital is 14%. Project M Project N Initial investment (CF) $28,500 527,000 Year () Cash inflows (CF) 1 $10,000 $11,000 10,000 10,000 2. 10,000 3. 9,000 10,000 8,000 a. Calculate each project's payback period. b. Calculate the net present value (NPV) for each project. c. Calculate the internal rate of return (IRR) for each project. d. Summarize the preferences dictated by each measure you calculated 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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Transcribed Image Text:Problem 1: Fitch Industries is in the process of choosing the better of two equal-risk, mutually
exclusive capital expenditure projects-M and N. The relevant cash flows for each project are
shown in the following table. The firm's cost of capital is 14%.
Project M
Project N
Initial investmecnt (CF)
528,500
527,000
Year (t)
Cash inflows (CF)
$10,000
10,000
10,000
10,000
$11,000
2.
10,000
9,000
4.
8,000
a. Calculate each project's payback period.
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Summarize the preferences dictated by each measure you calculated and
indicate which project you would recommend. Explain why.
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