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Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows:
Year Project A Project B
__________________________________________________________________________________
1 $ 5,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
What are the two projects' net present values, assuming the cost of capital is 5%? 10%? 15%?
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Carl leases 2 acres of land to his friend, Larry. Larry intends to build a house on the property which will significantly increase its value.
It requires that all projects have a positive net present value when cash flows are discounted at 10 percent and that all projects have a payback no longer than three years. Which project or projects should the firm accept? Why?
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What is the addition to retained earnings?
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