All techniques with NPV profile—Mutually exclusive projects Fitch Industries is in the process of…

All techniques with NPV profile—Mutually exclusive projects Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects—M and N. The relevant cash flows for each project are shown in the following table. The firm’s cost of capital is 14%.

Project M

Project N

Initial investment (CF0)

$28,500

$27,000

Year (t)

Cash inflows

(CFt)

1

$10,000

$11,000

2

10,000

10,000

3

10,000

9,000

4

10,000

8,000

a. Calculate each project’s payback period.

b. Calculate the net present value (NPV) for each project.

c. Calculate the internal rate of return (IRR) for each project.

d. Summarize the preferences dictated by each measure you calculated, and indicate which project you would recommend. Explain why.

e. Draw the net present value profiles for these projects on the same set of axes, and explain the circumstances under which a conflict in rankings might exist.

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