13 (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	-40000	-40000
Inflow year 1	13625	0
Inflow year 2	13625	0
Inflow year 3	13625	0
Inflow year 4	13625	0
Inflow year 5	13625	90000

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

a. What is the payback period of project A?

years(Round to two decimal places.)

What is the payback period of project B?

years(Round to two decimal places.)

b. What is the NPV of project A?

(Round to the nearest cent.)

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.)

What is the IRR of project B?

%

(Round to two decimal places.)

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

A. The projects evaluated have the same initial cash outlay.

B. The two projects are independent.

C. The free cash flows genearted by the projects are different.

D. The NPV and IRR decision criteria have different reinvestment assumptions.

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

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

D. 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.