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Mercken Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12 percent, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12 percent.

                Project P              Project Q             Project R              Project S

Initial cost           $200,000              $235,000              $190,000              $210,000

Annual Cash Flows                                                         

Year 1   $ 93,000                $ 90,000                $ 45,000                $ 40,000

Year 2   93,000   85,000   55,000   50,000

Year 3   93,000   75,000   65,000   60,000

Year 4   0              55,000   70,000   65,000

Year 5   0              50,000   75,000   75,000

 

Net present value           $23,370 $29,827 $27,233 $(7,854)

Internal rate of return   18.7%    17.6%    17.2%    10.6%

                                                               

For Merken Industries the NPV and IRR for each project are provided.

Calculate the Profitability index for each Project.

Calculate the Payback Period for each Project.

If Merken can only accept one project, which one should the company choose? Why? In your opinion what makes it potentially the best project for the company?

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