1A)

The Tatherton Fuels Company is evaluating its potential investments for the coming year, they are particularly interested in the following independent projects. The firm uses a discount rate of 11.5% for all it's projects. Based on the NPV of these two projects, what is your recommendation concerning these which of these projects the firm should take, if any?

Project 1

Year	Cash Flow
0	-$91,850
1	$28,405
2	$64,890

Project 2

Year	Cash Flows
0	-$45,000
1	$38,500
2	$17,325

a. You should accept project 1 and reject project 2.

b. You should reject both projects.

c. You should accept both projects.

d. You should accept project 1 and reject project 2.

e. You should accept project 1 and be indifferent to project 2.

1B)

When evaluating a project, the most reliable decision making rules are the NPV and IRR. However, we have learned that NPV rule is more reliable than the IRR because of a few special cases in which the IRR rule gives an incorrect answer. What are those special cases?

1. The firm is evaluating several mutually exclusive projects
2. When the NPV of a project is equal to 0
3. The project has non-normal cash flows
4. When the project involves aliens

a. all of the above.

b. 1, 2, and 3.

c. 2 and 4 only.

d. 1 and 2 only.

e. 1 and 3 only.

1C)

The Alpha Centauri Dance Club is evaluating a project based on the following estimated cash flows:

0	1	2	3	4
-$26329	$11,000	$15,000	$11,000	$16,000

A discount rate of 3% is used to evaluate all the companies potential projects. You may have rounding errors in your calculations so choose the closest answer. Assume cash flows are received equally over the year.

What is the Discounted Payback of the project shown above ?

a. 2.33 years.

b. 1.10 years.

c. 4.00+ years.

d. 2.15 years.

e. 3.25 years.

ANSWER