Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows: Year Project A Project B 1 $5,000,000 $20,000,000 2 $10,000,000 $10,000,000 3 $15,000,000 $8,000,000 4 $20,000,000 $6,000,000 a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. [Note: you are supposed to show every step of your calculation and interpret the result.]
Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows: Year Project A Project B 1 $5,000,000 $20,000,000 2 $10,000,000 $10,000,000 3 $15,000,000 $8,000,000 4 $20,000,000 $6,000,000 a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. [Note: you are supposed to show every step of your calculation and interpret the result.]
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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Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows:
|
Year |
Project A |
Project B |
|
1 |
$5,000,000 |
$20,000,000 |
|
2 |
$10,000,000 |
$10,000,000 |
|
3 |
$15,000,000 |
$8,000,000 |
|
4 |
$20,000,000 |
$6,000,000 |
a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. [Note: you are supposed to show every step of your calculation and interpret the result.]
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