Consider the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)

0 -365,000 -40,000

1 38,000 20,300

2 47,000 15,200

3 62,000 14,100

4 455,000 11,200

• Whichever project you choose, if any, you require a return of 13 percent on

• your investment.

  • If you apply the payback criterion, which investment will you choose? Why?

  • If you apply the NPV criterion, which investment will you choose? Why?

  • If you apply the IRR criterion, which investment will you choose? Why?

  • If you apply the profitability index criterion, which investment will you choose? Why?

  • Based on your answers in (a) through (d), which project will you finally choose? Why?