1- Following are the estimated after-tax cash flows for two mutually exclusive p

ID: 2621356 • Letter: 1

Question

1- Following are the estimated after-tax cash flows for two mutually exclusive projects:

Following are the estimated after-tax cash flows for two mutually exclusive projects:

year Machine D Machine Q

0 $(32,500) $(29,800)

1 20,500 4,000

2 10,000 9,000

3 6,500 16,000

4 7,800 19,500

The company's rate of return is 16 percent. What is the internal rate of return (IRR) of the projects the company shoul purchase?

year Project T Project U

0 $(8,000) $(10,000)

1 2,000 9,000

2 1,000 5,000

3 7,000 (3,100)

Which project(s) should the company purchase? why?

2 Project T

NPV= -8000+(2000/1.09)+(1000/1.09^2)+(7000/1.09^3)= $ 81.826

IRR,

8000=(2000/r)+(1000/r^2)+(7000/r^3)

r= 9.455%

Discounted PAyback period=2.98 years

Project U

NPV= -10000+(9000/1.09)+(5000/1.09^2)+(-3100/1.09^3)= $ 71.512

IRR,

10000=(9000/r)+(5000/r^2)+(-3100/r^3)

r= 9.825%

Discounted PAyback period= 1.414 years

Project 2 must be chosen since itsDiscounted PAyback period is less.

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