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You are a financial analyst for the Ubuntu Inc. The director of capital budgeting has asked you to analyse two proposed mutually exclusive capital investment projects, Projects X and Y. The cost of capital for each project is 12%The projects expected net cash flows are as follows: Expected Net Cash Flows 0 ($100,000) ($10,000) 2 4 Year Project X Project Y 60,500 30,000 30,000 10,000 5,500 4,500 3,500 3,500 a. If you apply the payback criterion, which investment will you choose? (0.5) b. If you apply the NPV criterion, which investment will you choose? (1) c. If you apply the IRR criterion, which investment will you choose? (1) d. If you apply the MIRR criterion, which investment will you choose? (0.5) e. Based on your answers from A to D, which project will you finally choose? Why?

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Project X Computation of Net Present Value Discount Rate 12% Present Cash flowspV factor Value Year Cumulative Initial Investment Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before tax Total 0 (100,000).0(100,000) 60,500 0.8928654,018 60,500 90,500 330,000 0.7117821,353 120,500 2 30,000 0.79719 23,916 4 10,000 0.63552 6,355 NPV- 30,500 5,642 15.47% 13.55% 5,642 NPV- MIRR- Payback 2.32 Years Project Y Computation of Net Present Value Discount Rate 12%) Present Cash flows PV factor Value (10,000)1.00 ,500 0.89286 Year Cumulative Initial Investment Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before tax Total (10,000) 4,911 0 5,500 4,500 0.797193,58 10,0000 2 :1782,491 13,500 17,000 3,500 0.71178 3,500 0.63552 7,000 3,214 4 2,224 3,214 NPV NPV- IRR= MIRR= Payback 28.10% 20.08% 2.00 Years Since NPVis higherin case of projectx,hence project x should be accepted.

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