Question
DEF, Inc. is considering the following two mutually exclusive projects with similar risks: Year Project A Project B 0 $30,000 $40,000 1 $10,500 $8,800 2
DEF, Inc. is considering the following two mutually exclusive projects with similar risks:
Year | Project A | Project B |
0 | $30,000 | $40,000 |
1 | $10,500 | $8,800 |
2 | $5,600 | $4,400 |
3 | $14,400 | $25,600 |
4 | $8,800 | $10,500 |
(a) What is the IRR for each of the projects? The required return is 10%. If you apply the IRR decision rule, which project should the company accept?
(b) If the required rate is 10%, what is the NPV for each of the projects? Which project will you choose if you apply the NPV rule?
(c) Calculate the payback periods. The target payback period is 3 years. Which project will you choose if you apply the payback period rule?
(d) Find the profitability index of each project. Which project will you choose if you apply the profitability index rule?
(e) What is your final decision? Explain.
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