Question 3: Juhayna Food Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in...

Question 3:

Juhayna Food Industries is attempting to select the best of three mutually exclusive projects.

The initial investment and after-tax cash inflows associated with these projects are shown in the following table.

  Taking into consideration that the cost of debt 7% , cost of preferred stock 12% and cost of new common stock 15%. The weight of each source of capital are long term debt 30% , preferred stock 20% and common stock equity 50%.

To compute the firm's cost of the capital where

Cost of debt = 7%

Cost of preferred stock = 12%

Cost of common stock = 15%

Weight of long term debt = 30%

Weight of preferred stock = 20%

Weight of common stock equity = 50%

 The firm's cost of capital is 12%.

1. Calculate the internal rate of return (IRR) for each project.


2. Discuss any conflict in ranking that may exist between NPV and IRR.


3. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why