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1. Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the
properties today and sell them five years from today. The following table summarizes the initial cost and
the expected sale price of each property, as well as appropriate discount rate based on the risk of each
venture.
Required: Compute the profitability index for each proposal and rank the proposals in terms of
preference.
3. The Pinkerton publishing company is considering two mutually exclusive expansion plans. Plan A calls
for the expenditure of $50 million on a large-scale, integrated plant that will provide an expected cash flow
stream of $8 million per year for 20 years. Plan B calls for the expenditure of $15 million to build a
somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.4 million
per year for 20 years. The firms cost of capital is 10%.
a. Calculate each projects NPV and IRR.
b. Which project would you choose?
4. Your division is considering two projects with the following net cash flows (in millions):