Question
ABC Inc. is considering the following two mutually exclusive investment projects: Year Project A Project B 0 -$150,000 -$80,000 1 $60,000 $28,000 2 $60,000 $42,000
ABC Inc. is considering the following two mutually exclusive investment projects:
Year Project A Project B
0 -$150,000 -$80,000
1 $60,000 $28,000
2 $60,000 $42,000
3 $60,000 $40,000
4 $80,275 $44,000
Both projects carry similar risks. The expected annual return on similar projects in the market is 8%.
[Note that for parts (a) to (c), full mark would only be given if correct numerical formula is provided.]
(a) If ABC has set a 3-year target/cutoff payback period for the firms investment projects, analyze
which project will be chosen.(3 marks)
(b) Using the NPV decision rule, analyze which project will be chosen. (7 marks)
(c) Using the IRR decision rule, analyze which project will be chosen. (Round your final answers to
the nearest integer).(5 marks)
(d) Based on your answers in parts (a) to (c), determine which project ABC should choose. Explain
your rationale. (3 marks)
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