Consider the Following Projects, X and Y Where the Firm

question 115

Essay

Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Sketch a net present value profile for each of these projects. Which project should the firm choose if the cost of capital is 10 percent? What if the cost of capital is 25 percent? Show all work.

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Definitions:

Heuristics

Mental shortcuts or "rules of thumb" that simplify decision making by reducing the amount of information processed.

Algorithms

Precise rules or procedures that are systematically followed to produce a specific outcome or to solve a problem.

Morpheme

In a language, the smallest unit that carries meaning; may be a word or a part of a word (such as a prefix).

Phoneme

In a language, the smallest distinctive sound unit.