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Question: You arrived at work today to see the CFO, COO and most of the company's top management team taken away in handcuffs. The only executive who was not arrested was the newly appointed CEO. Before you can even reach your cube, the CEO calls you into his office to explain some incomplete project analysis left on the CFO's desk. Below are the two mutually exclusive projects under consideration.
Year
Project A
Project B
0
(171,000.00)
(198,000.00)
1
46,000.00
55,000.00
2
79,000.00
34,000.00
3
51,000.00
120,000.00
4
65,000.00
25,000.00
5
23,000.00
75,000.00
IRR
17.82%
16.22%
While a marketing genius, the CEO has very little experience in finance, and would like to simply choose 'Project A' because "it earns a higher return for the company."
a. Explain (in words and graphically) why the CEO's reasoning could be flawed.
b. If your firm has a cost of capital of 8%, how much value will the firm lose out on by choosing the project with the highest IRR?
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Garner-Wagner is considering investing in a project that requires an investment of $3,000,000. The project will generate a cash inflow of 500,000 per year for the next 5 years. The cost of capital is 10%. What is the project's net present value?
Dixon Shuttleworth has been offered the choice of three retirement-planning investments. The first investment offers a 5% return for the 1st five years, a 10% return for the next five years, and a 20% return thereafter.
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You have saved $3,000 for a down payment on a new car. The largest monthly payment you can afford is $450. The loan would have a 11% APR based on end-of-month payments.
How large are an equal annual end - of - year deposit must be made into an account paying an annual rate of interest of 13% in order to buy the ski chalet upon retirement?
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