BioCom's standard capital request form includes a narrative description of the project and the customer need that the company must fulfill. If the request originates with R&D, it then goes to the marketing department for a preliminary sales forecast and then to the production manager and cost analysts for cost estimates. If a proposal shows promise after these steps, it goes to the CFO, who has a staff member enter the data into a spreadsheet template. The template com- putes payback, discounted payback, net present value, internal rate of return, and modified internal rate of return. BioCom uses net present value as its primary decision criterion, but company executives believe that the other statistics provide some useful additional perspectives. To explain BioCom's capital budgeting techniques, Jane has decided to present the cash flows from two recent proposals: the nano test tube project and the microsurgery kit project. All figures are in thousands of dollars: Cash Flow Investment Cash flow year 1 Cash flow year 2 Cash flow year 3 Cash flow year 4 Cash flow year 5 Nano Test Tubes -$11,000 2,000 3,000 4,000 5,000 7,000 Microsurgery Kits -$11,000 4,000 4,000 4,000 4,000 4,000 Help Jane answer the following questions. Questions 1. Compute the payback period for each project. a. Explain the rationale behind the payback method. b. State and explain the decision rule for the pay- back method. c. Explain how the company would use the payback method to rank mutually exclusive projects. d. Comment on the advantages and shortcomings of this method 2. Compute the discounted payback period for each project using a discount rate of 10%. a. Explain the rationale behind the discounted pay- back method. b. Comment on the advantages and shortcomings of this method. 3. Compute the net present value (NPV) for each proj- ect. BioCom uses a discount rate of 9% for projects of average risk. a. Explain the rationale behind the NPV method. b. State and explain the decision rule for the NPV method. c. Explain how the company would use the NPV method to rank mutually exclusive projects. d. Comment on the advantages and shortcomings of this method. e. Without performing any calculations, explain what happens to the NPV if the company adjusts the discount rate upward for projects of higher risk or downward for projects of lower risk. 4. Compute the internal rate of return (IRR) for each project. a. Explain the rationale behind the IRR method. b. State and explain the decision rule for the IRR method. Assume a hurdle rate of 9%. c. Explain how the company would use the IRR method to rank mutually exclusive projects. d. Comment on the advantages and shortcomings of this method. 5. Compute the modified internal rate of return (MIRR) for each project. a. Explain the rationale behind the MIRR method. b. State and explain the decision rule for the MIRR method. Assume a hurdle rate of 9%. c. Explain how the company would use the MIRR method to rank mutually exclusive projects. d. Explain how this method corrects for some of the problems inherent in the IRR method. 6. Explain to the R&D staff why BioCom uses the NPV method as its primary project selection criterion. 7. Challenge question. Construct NPV profiles for both projects using discount rates of 1% through 15% at intervals of one percentage point. At approxi- mately what discount rate does the nano test tube project become superior to the microsurgery kit project? You are better off solving this problem using an electronic spreadsheet. BioCom's standard capital request form includes a narrative description of the project and the customer need that the company must fulfill. If the request originates with R&D, it then goes to the marketing department for a preliminary sales forecast and then to the production manager and cost analysts for cost estimates. If a proposal shows promise after these steps, it goes to the CFO, who has a staff member enter the data into a spreadsheet template. The template com- putes payback, discounted payback, net present value, internal rate of return, and modified internal rate of return. BioCom uses net present value as its primary decision criterion, but company executives believe that the other statistics provide some useful additional perspectives. To explain BioCom's capital budgeting techniques, Jane has decided to present the cash flows from two recent proposals: the nano test tube project and the microsurgery kit project. All figures are in thousands of dollars: Cash Flow Investment Cash flow year 1 Cash flow year 2 Cash flow year 3 Cash flow year 4 Cash flow year 5 Nano Test Tubes -$11,000 2,000 3,000 4,000 5,000 7,000 Microsurgery Kits -$11,000 4,000 4,000 4,000 4,000 4,000 Help Jane answer the following questions. Questions 1. Compute the payback period for each project. a. Explain the rationale behind the payback method. b. State and explain the decision rule for the pay- back method. c. Explain how the company would use the payback method to rank mutually exclusive projects. d. Comment on the advantages and shortcomings of this method 2. Compute the discounted payback period for each project using a discount rate of 10%. a. Explain the rationale behind the discounted pay- back method. b. Comment on the advantages and shortcomings of this method. 3. Compute the net present value (NPV) for each proj- ect. BioCom uses a discount rate of 9% for projects of average risk. a. Explain the rationale behind the NPV method. b. State and explain the decision rule for the NPV method. c. Explain how the company would use the NPV method to rank mutually exclusive projects. d. Comment on the advantages and shortcomings of this method. e. Without performing any calculations, explain what happens to the NPV if the company adjusts the discount rate upward for projects of higher risk or downward for projects of lower risk. 4. Compute the internal rate of return (IRR) for each project. a. Explain the rationale behind the IRR method. b. State and explain the decision rule for the IRR method. Assume a hurdle rate of 9%. c. Explain how the company would use the IRR method to rank mutually exclusive projects. d. Comment on the advantages and shortcomings of this method. 5. Compute the modified internal rate of return (MIRR) for each project. a. Explain the rationale behind the MIRR method. b. State and explain the decision rule for the MIRR method. Assume a hurdle rate of 9%. c. Explain how the company would use the MIRR method to rank mutually exclusive projects. d. Explain how this method corrects for some of the problems inherent in the IRR method. 6. Explain to the R&D staff why BioCom uses the NPV method as its primary project selection criterion. 7. Challenge question. Construct NPV profiles for both projects using discount rates of 1% through 15% at intervals of one percentage point. At approxi- mately what discount rate does the nano test tube project become superior to the microsurgery kit project? You are better off solving this problem using an electronic spreadsheet