2. You are a financial analyst for Stanton Corp. Your primary responsibility is

Question

2. You are a financial analyst for Stanton Corp. Your primary responsibility is to evaluate and recommend projects that the firm should undertake. Your CFO has indicated to you that the firm will have $2 million available for new projects in the upcoming year. Your divisional managers have submitted four proposals for consideration. You have calculated the relevant cash flows and IRRs for the four projects Project 2 3 4 CFs 0.35m 0.35m 0.55m 2 m 1.3m 0.9m 0.65m 0.8m 0.5m 0.1m -1 m 0.3m 0.4m 0.9m 2 IRR 11 .08% 23.04% 25.99% 22.56% which project(s) should the firm undertake? The firm's hurdle rate is 12%

Explanation / Answer

Since we have 2 million and hurdle rate is 12% project 1 cannot be undertaken
Project 3 & 4 combined IRR is more than that of project 2, hence project 3 and 4 shall be selected

Year Project 1 2 Project 3 & 4 0 -1 -2 -2 1 0.35 1.3 1.1 2 0.35 0.9 0.9 3 0.55 0.65 1 IRR 11.08% 23.04% 23.89%

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