10-1

The Tiger Co. is considering an expansion of its product line and is evaluating two independent projects: Project A and Project B.

The required rate of return applicable to Project A is 12%, and 16% for Project B.

The estimated yearly cash flows (in millions) for each project are presented in the table below:

YEARS Project A Project B

Year 0 -$390 -$230

Year 1 $120 $70

Year 2 $140 $80

Year 3 $160 $90

Year 4 $180 $100

Year 5 $120

a. Calculate the Payback Period of each project and interpret its meaning. Which project(s) should be accepted? Explain.

b. Calculate the Discounted Payback Period of each project and interpret its meaning. Which project(s) should be accepted? Explain.

c. Calculate the Profitability Index of each project and interpret its meaning. Which project(s) should be accepted? Explain.

d. Calculate the projects Net Present Value of each project and interpret its meaning. Which project(s) should be accepted? Explain.

e. Calculate the projects Internal Rate of Return of each project and interpret its meaning. Which project(s) should be accepted? Explain.

f. Based on your analysis above, which project(s) should be accepted? Explain.

g. Which project(s) should the project be accepted, if the two projects were mutually exclusive? Explain.