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alexriverajr
May 22, 2009, 12:05 PM
I have solved the math part of this problem but don't quite understand what they are asking for in problems d & e.

Thomas Company is considering two mutually exclusive
projects. The firm, which has a 12 % cost of capital, has estimated its cash flow as
shown in the following table.

Project A Project B
Initial investment (CFo) $130,000 $85,000
Year (t) Cash inflows (CFt )
1 $25,000 $40,000
2 35,000 35,000
3 45,000 30,000
4 50,000 10,000
5 55,000 5,000

These are my calculations for a & b:

Project A Project B Project A Project B
Year 0 -$130,000 -$85,000 -$130,000 -$85,000
Year 1 $22,321 $35,714 $25,000 $40,000
Year 2 $27,902 $27,902 $35,000 $35,000
Year 3 $32,030 $21,353 $45,000 $30,000
Year 4 $31,776 $6,355 $50,000 $10,000
Year 5 $31,208 $2,837 $55,000 $5,000

a. NPV $15,238 $9,162
Both projects are acceptable but A is superior to B.

b. IRR 16.06% 17.75%
Both projects are acceptable but B is superior to A.

These are the problem I'm not sure how to answer.

d. Evaluate and discuss the rankings of the two projects on the basis of your findings
in parts a, b, and c.
e. Explain your findings in part d in light of the pattern of cash inflows associated
with each project.

Any help would be great.