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Problem #2 (32 marks) Your division is considering 2 investment projects, each which requires an upfront expenditure of $27 million. You estimate the cost of
Problem #2 (32 marks)
Your division is considering 2 investment projects, each which requires an upfront expenditure of $27 million. You estimate the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars).
| Year | Project A | Project B |
| 0 | -$27 | -$27 |
| 1 | $5 | $20 |
| 2 | $10 | $10 |
| 3 | $15 | $8 |
| 4 | $22 | $8 |
- What is the regular payback period for each of these projects? (6 marks)
- What is the discounted payback period for each of these projects? (6 marks)
- If the projects are independent and the cost of capital is 10%, which project or projects would you undertake? (5 marks)
- If the projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? (5 marks)
- If the projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? (5 marks)
- Based on the profitability index (PI), what is your recommendation concerning these projects if these projects are independent and the cost of capital is 10%? (5 marks)
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