2.Anne is considering two independent projects with 2-year lives. Both projects have been assigned a discount rate of 13 percent. She has sufficient funds to finance one or both projects. Project A costs $38,500 and has cash flows of $19,400 and $28,700 for Years 1 and 2, respectively. Project B costs $41,000, and has cash flows of $25,000 and $22,000 for Years 1 and 2, respectively. Which project, or projects, if either, should you accept based on the profitability index method and what is the correct reason for that decision?

You should accept both projects since both of their PIs are positive.

You should accept Project A since it has the higher PI and you can only select one.

You should accept both projects since both of their PIs are greater than 1.

You should only accept project A since it has the largest PI and the PI exceeds one.

Neither project is acceptable.

3.Project A costs $84,500 and has cash flows of $32,300, $36,400, and $30,000 for Years 1 to 3, respectively. Project B has an initial cost of $79,000 and has cash flows of $30,000, $36,000, and $29,000 for Years 1 to 3, respectively. What is the incremental IRR of these two mutually exclusive projects?

18.11%

13.01%

14.91%

16.75%

20.37%

4.A $218,000 project has equal annual cash flows over its 7-year life. If the discounted payback period is seven years and the discount rate is 0%, what is the amount of the cash flow in each of the seven years?

$31,142.86 per year for each of the seven years

$0 for Years 1 to 6 and $218,000 in Year 7

Any amount between $0 and $218,000 for any one year, provided the sum of the seven cash flows totals $218,000.

$218,000 for Year 1 and $0 for Years 2 through 7.

$30,421.14 per year for each of the seven years

8.You are considering two independent projects with the same discount rate of 11 percent. Project A costs $284,700 and has cash flows of $75,900, $106,400, and $159,800 for Years 1 to 3, respectively. Project B costs $115,000, and has a cash flow of $50,000 a year for Years 1 to 3. You have sufficient funds to finance any decision you make. Which project or projects, if either, should you accept and why?

Project A; because it has the larger NPV

Project B; because its IRR exceeds the discount rate

both projects; because their NPVs are both positive

Project A; because it is the larger-sized project with a positive IRR

neither project; because their NPVs are less than their initial costs

12. An investment with an initial cost of $4,000 produces cash flows of $3,400, $500, $2,800, $100, and $6,000 for Years 1 to 5, respectively. How many IRRs does this project have?

4

3

5

6

2

10.Juan is considering two independent projects. Project A costs $74,600 and cash flows of $18,700, $46,300, and $12,200 for Years 1 to 3, respectively. Project B costs $70,000 and has cash flows of $10,600, $15,800, and $67,900 for Years 1 to 3, respectively. Juan assigns a discount rate of 10 percent to Project A and 12 percent to Project B. Which project or projects, if either, should he accept based on the profitability index rule?

accept both projects

accept Project A and reject Project B.

accept either A or B, but not both

reject both projects

accept Project B and reject Project A