1. (Time-disparity problem)

The State Spartan Corporation is considering two mutually exclusive projects. The free cash flows associated with these projects are shown in the popup window:

PROJECT A PROJECT B

Initial outlay -50,000 -50,000

Inflow year 1 15,625 0

Inflow year 2 15,625 0

Inflow year 3 15,625 0

Inflow year 4 15,625 0

Inflow year 5 15,625 100,000

The required rate of return on these projects is 9 percent.

a. What is each project's payback period?

b. What is each project's NPV?

c. What is each project's IRR?

d. What has caused the ranking conflict?

e. Which project should be accepted? Why?

a. What is the payback period of project A? years (Round to two decimal places.) ANSWER:

What is the payback period of project B? years (Round to two decimal places.) ANSWER:

b. What is the NPV of project A? $(Round to the nearest cent.) ANSWER:

What is the NPV of project B? $(Round to the nearest cent.)

c. What is the IRR of project A? % (Round to two decimal places.) ANSWER:

What is the IRR of project B? % (Round to two decimal places.) ANSWER:

d. What has caused the ranking conflict? (Select the best choice below.)

A.

The projects evaluated have the same initial cash outlay.

B.

The free cash flows genearted by the projects are different.

C.

The NPV and IRR decision criteria have different reinvestment assumptions.

D.

The two projects are independent.

e. Which project should be accepted? Why? (Select the best choice below.)

A.

Project B should be chosen because it has higher NPV. The NPV criterion is preferred because it makes the most acceptable reinvestment assumption for the wealth-maximizing firm.

B.

Neither project A nor B should be chosen because ranking conflict exists among different decision criteria. Different decision criteria should yield the same result.

C.

Project A should be chosen because it has higher IRR. The IRR criterion is preferred because it makes the most acceptable reinvestment assumption for the wealth-maximizing firm.

D.

Project A should be chosen because it has lower payback period. The payback period is preferred because it can be easily computed.

PLEASE ANSWER THE QUESTION FULLY AND CORRECTLY!!!