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Instructions:  Solve for what is required in each independent case.

 
Fitch Industries is in the process of choosing the better of two equal-risk, mutually
exclusive capital expenditure projects, Project M and Project N.  The firm's cost of
capital is 14%.  
 
The relevant cash flows of each project are as follows:
 

Project M Project N
Cost of initial
28,500 27,000
investment
Operating cash
inflows
Year 1 10,000 11,000
Year 2 10,000 10,000
Year 3 10,000 9,000
Year 4 10,000 8,000

 
1.  Calculate each project's payback period. (15 pts)
2.  Using payback period, which project should be accepted?  Why? (15 pts)
3.  Calculate the net present value (NPV) for each project. (15 pts)
4.  Using NPV, are both projects acceptable?  Which project should be prioritized by
Fitch? (20 pts)
5.  Calculate the internal rate of return (IRR) of each project. (15 pts)
6.  Using IRR, are both projects acceptable?  Which project should be prioritized by
Fitch? (20 pts)

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