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Your company is presented with two proposals, ABC and XYZ, with equal risks that require initial investments of $95,000 and $100,000 respectively

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Your company is presented with two proposals, ABC and XYZ, with equal risks that require initial investments of

$95,000 and $100,000 respectively. Assume a cost of capital of 14%. Subsequent a fter tax end-of-year net cash inflows are given as follows:

 

Year    Proposal ABC  Proposal XYZ

1

$32,500

$30,000

2

35,000

30,000

3

35,000

30,000

4

35,000

30,000

Required:

*****READ VERY CAREFULLY*****

1) (10 marks)

(a) Place your answer for each of the proposals by ranking method in the table below.

(b) For each ranking method, what is the better choice? "ABC" or "XYZ"? Circle the better choice. (There should be only ONE answer circled PER row.)

Ranking Method

"Proposal ABC"

"Proposal XYZ"

Payback periods

Net Present Value

Internal Rate of Return

Profitability Index

2) (2 marks)

If mutually exclusive projects are being evaluated, NPV and IRR criteria may not always lead to the same accept/reject decision. Explain. (Marks will be awarded on the basis of explanation.)