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Digg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($)...

Digg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($) (including depreciation) are following:

Project A                              Project B

Year 0    -6000 -17500

Year 1    2000                                       5600

Year 2    2000                                       5600

Year 3    2000                                       5600

Year 4    2000                                       5600

Year 5    2000                                       5600

Year 6    4000                                       9000

If company’s WACC is 13%, find NPV, IRR, Payback and discount payback for each project. If the projects are mutually exclusive what is your recommendation to the company.


Solutions

Expert Solution

If the projects are mutually exclusive, the Project B is recommended since it has higher NPV of $6,519.36 despite contradicting results in IRR and dicounted paback periods method. NPV helps in calcualting the returns in the absolute terms which eases the managerial decision making.


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