IBM networks want to modernize their networking system. Proposals have been received from two major software...

IBM networks want to modernize their networking system. Proposals have been received from two major software companies. The first proposal cost $6million but will raise the firm's annual cash flows by $3million. The second proposal cost $7million and provides cash flow of $3.5million a year. Both projects have a life span of 3 years. Assuming that the cost of capital is 8%, which proposal may be recommended on the basis of Net Present Value criteria. Select

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Expert Solution

Answer:- Second Proposal should be recommended on the basis of Net Present Value criteria as the NPV of second proposal is higher the NPV of the first proposal.

Explanation:-

Following is the Excel Sheet showing NPV calculation of both proposals:-

Following is the Formula sheet of above excel sheet for easy understanding of the calculations done:-

jeff jeffy answered 1 year ago

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