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Caledonia answers - return Project B should be taken...

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Caladonia Products Year Project A Project B 0 ($100,000) ($100,000) 1 $32,000 $0 2 $32,000 $0 3 $32,000 $0 4 $32,000 $0 5 $32,000 $200,000 a) Payback Schedule - Project A Year Cash Inflow 0 $100,000 $0 $100,000 1 $100,000 $32,000 $68,000 2 $68,000 $32,000 $36,000 3 $36,000 $32,000 $4,000 4 $4,000 $32,000 ($28,000) Payback Period 3.13 b) NPV- Project A Year Cash Flow PV Factor @ 11% PV 0 ($100,000) 1 ($100,000) 1 $32,000 0.9009 $28,829 2 $32,000 0.8116 $25,972 3 $32,000 0.7312 $23,398 4 $32,000 0.6587 $21,079 5 $32,000 0.5935 $18,990 NPV- Project A $18,268.70 c) IRR Year Project A Project B 0 ($100,000) ($100,000) 1 $32,000 $0 2 $32,000 $0 3 $32,000 $0 4 $32,000 $0 5 $32,000 $200,000 IRR 18.03% 14.87% Beginning Unrecovered Investment Ending Unrecovered Investment
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d) e) The conflicting rankings are caused by the differing reinvestment assumptions made by th NPV criteria assumes that cash flows over the life of the project can be reinvested at the r while the IRR criterion implicitly assumes that the cash flows over the life of the project c
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Unformatted text preview: return. Project B should be taken because it has the largest NPV. The NPV criterion is preferred assumption for the wealth-maximizing firm Payback Schedule - Project B Year Cash Inflow $100,000 $0 $100,000 1 $100,000 $0 $100,000 2 $100,000 $0 $100,000 3 $100,000 $0 $100,000 4 $100,000 $0 $100,000 5 $100,000 $200,000 Payback Period 4.5 NPV- Project B Year Cash Flow Factor @ 11 PV ($100,000) 1 ($100,000) 1 $0 0.9009 $0 2 $0 0.8116 $0 3 $0 0.7312 $0 4 $0 0.6587 $0 5 $200,000 0.5935 $118,690 NPV- Project B $18,690.27 Beginning Unrecovered Investment Ending Unrecovered Investment the NPV and IRR decision criteria. The required rate of return or cost of capital, can be reinvested at the internal rate of d because it makes the most acceptable...
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