1. The CFO of Mac Pattys is evaluating a project that costs $56,000. The project will generate $13,500 each of the next five years. Answer the following:

a) Describe how the IRR technique would be used to make this investment decision.

b) If Mac Pattys required rate of return is 8.2 percent, should the project be purchased?

2. Explain why capital budgeting is an important process in financial management.

3. If a firm has no mutually exclusive projects, only independent ones, and it also has both a constant required rate of return and projects with conventional cash flow patterns, then the NPV and IRR methods will always lead to identical capital budgeting decisions. Discuss this statement. What does it imply about using the IRR method in lieu of the NPV method? If the projects are mutually exclusive, would your answer be the same?

4. Sparrow Nails is evaluating a capital budgeting project that should generate $117,000 per year for four years.

(a)If its required rate of return is 16.5 percent, what is the value of the project to Sparrow?

(b)If Fancy Fingers Inc. evaluates the same project with its required rate of return of 13 percent, what will it determine the value of the project to be?

(c)Compare the two results that you find.

5. Kates Kite Surfing is evaluating a capital budgeting project that costs $43,000 and is expected to generate after-tax cash flows equal to $15,300 per year for three years. KKS required rate of return is 12 percent. Compute the projects

(a)net present value (NPV) and

(b)internal rate of return (IRR).

(c)Should the project be purchased?