ST-2. . [ 1 ]

a. NPVA = $70,000 I - $50,000

(1 + .12)

= $62,500 - $50,000

= 12,500 NPVB = $130,000 [ 1 1] $

100,000

(1 + .12)

116,071 = $100,000 160,071

$62,500

b. PIA

$50,000 1.250

$116,071 PIB

$100,000

= 1.1607

c. $50,000 = $70,000 (PVIFi,lyr)

.7143 = PVIF 1 I, yr Looking for a value of PVIFi,Iyr in Appendix C, a value of.714 is found in the 40 percent column. Thus, the IRR is 40 percent.

$10.0,000 = $130,000(PVIFi ,lyr)

.7692 = PVIFi,lyr Looking for a value of PVIFi, 1y r in Appendix C, a value of.769 is found in the 30 percent column. Thus, the IRR is 30 percent.

d. If there is no capital rationing, project B should be accepted because it has a larger net present value. If there is a capital constraint, the problem focuses on what can be done with the additional $50,000 (the additional inoney that could be invested if project A, with an initial outlay of $50,000, were selected over project B, with an initial outlay of

$100,000). In the capital constraint case, if Serrano can earn more on project A plus the marginal project financed with the additional $50,000 than it can on project B, then project A and the marginal project should be accepted.