Question
Consider the following two mutually exclusive projects: Year Cash Flow (Project A) Cash Flow (Project B) 0 -625,000,000 -480,000,000 1 65,000,000 40,000,000 2 120,000,000 82,000,000
Consider the following two mutually exclusive projects:
| Year | Cash Flow (Project A) | Cash Flow (Project B) |
| 0 | -625,000,000 | -480,000,000 |
| 1 | 65,000,000 | 40,000,000 |
| 2 | 120,000,000 | 82,000,000 |
| 3 | 183,000,000 | 157,000,000 |
| 4 | 240,000,000 | 201,000,000 |
| 5 | 240,000,000 | 185,000,000 |
| 6 | 160,000,000 | 120,000,000 |
| 7 | 95,000,000 | 90,000,000 |
| 8 | 45,000,000 | 40,000,000 |
The required return is 10% for both projects.
- Which project will you choose if you apply the NPV criterion? Why? Show your calculations.
(4 marks)
- Which project will you choose if you apply the payback criterion? Why? Show your calculations.
(3 marks)
- Which project will you choose if you apply the IRR criterion? Briefly explain your answer.
(4 marks)
- How are the decisions based on NPV and IRR criterion related?
(1 marks)
- Based on the above answers, which project will you finally choose? Briefly explain.
(2 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Fundamentals Of Corporate Finance
Authors: Stephen A Ross, Randolph W Westerfield, Bradford D Jordan
7th Edition
0073134295, 9780073134291
