All techniques with NPV profile—Mutually exclusive projects Projects A and B, of equal risk, are…

| February 3, 2015

All techniques with NPV profile—Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding the Rosa Company’s capacity. The firm’s cost of capital is 13%. The cash flows for each project are shown in the following table.

Project A

Project B

Initial investment (CF0)

$80,000

$50,000

Year (t)

Cash inflows (CFt)

1

$15,000

$15,000

2

20,000

15,000

3

25,000

15,000

4

30,000

15,000

5

35,000

15,000

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. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.

e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.

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