9-1 You are a financial analyst for Damon Electronics Company. The director of capital budgeting has

9-1 You are a financial analyst for Damon Electronics Company. The director of capital budgeting has askedyou to analyze two proposed capital investments, Projects X and Y. Each project has a cost of $10,000,and the required rate of return for each project is 12 percent. The projects’ expected net cash flows are asfollows:Expected Net Cash FlowsYear Project X Project Y 0 $(10,000) $(10,000) 1 6,500 3,500 2 3,000 3,500 3 3,000 3,500 4 1,000 3,500 a.Calculate each project’s traditional payback period (PB), net present value (NPV), and internal rate ofreturn (IRR),b.Which project or projects should be accepted if they are independent?c. Which project should be accepted if they are mutually exclusive?d.How might a change in the required rate of return produce a conflict between the NPV and IRR rankingsof these two projects? Would this conflict exist if r were 5 percent? (Hint: Plot the NPV profiles.)e.Why does the conflict exist?9-2 Compute the internal rates of return (IRRs) for following capital budgeting projects:Year Project G Project P Project V 0 $(23,000) $(48,000) $(36,000) 1 7,900 0 (10,000) 2 7,900 0 0 3 7,900 0 0 4 7,900 81,000 75,000 Based on IRRs, under what conditions should each project be purchased?9-3 Plasma Blood Services (PBS) is deciding whether to purchase a new blood cleaning machine that isexpected to generate the following cash flows. What is the machine’s IRR?Year0 Cash Flow$(140,000) 9-4 1 60,000 2 60,000 3 60,000 Following is information about two mutually exclusive capital budgeting projects:Cash FlowsYear Project Q Project R 0 $(4,000) $(4,000) 1 0 3,500 2 5,000 1,100 If the firm’s required rate of return is 10 percent, which project should be purchased?

 

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