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Consider the following two projects: Cash flows Project A Project B C 0 $ 200 $ 200 C 1 80 100 C 2 80 100
Consider the following two projects:
Cash flows | Project A | Project B | ||||
C0 | $ | 200 | $ | 200 | ||
C1 | 80 | 100 | ||||
C2 | 80 | 100 | ||||
C3 | 80 | 100 | ||||
C4 | 80 | |||||
- a. If the opportunity cost of capital is 11%, which of these two projects would you accept (A, B, or both)?
- b. Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 11%.
- c. Which one would you choose if the cost of capital is 16%?
- d. What is the payback period of each project?
- e. Is the project with the shortest payback period also the one with the highest NPV?
- f. What are the internal rates of return on the two projects?
- g. Does the IRR rule in this case give the same answer as NPV?
- h-1. If the opportunity cost of capital is 11%, what is the profitability index for each project?
- h-2. Is the project with the highest profitability index also the one with the highest NPV?
- h-3. Which measure should you use to choose between the projects?
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