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This problem has been solved! See the answer The X123 Company’s expansion plan has been very fruitful in the past few years The return to shareholders has been averaging 8%
This problem has been solved!
See the answer
The X123 Company’s expansion plan has been very fruitful in the past few years The return to shareholders has been averaging 8%. The Board of Directors believe the 8% growth rate would continue in future. X123 requires a cutoff payback of 3 years as an initial screen when selecting capital investment projects. The following 2 projects are under assessment for investment in the coming year. Cash flows from each of the project appear in the following table:
|
|
Project 1: plant expansion |
Project 2: new product Launch |
|
|
Cash inflows |
|
|
Initial investment |
($ 300,000) |
($ 300,000) |
|
Year-1 |
$ 90,000 |
$ 150,000 |
|
Year-2 |
$ 90,000 |
$ 120,000 |
|
Year-3 |
$ 90,000 |
$ 60,000 |
|
Year-4 |
$ 90,000 |
$ 60,000 |
|
Year-5 |
$ 90,000 |
$ 60,000 |
|
Year -6 |
$ 90,000 |
$ 60,000 |
Required:
- Calculate payback period for each project.
- Calculate NPV for each project
- Recommend which project X123 should invest in with justifications for your recommendation
Discuss the weaknesses of the IRR and NPV as a method if investment analysis
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