Problem 5-14 Investment criteria

Consider the following two projects:

Cash flows	Project A			Project B
C0	$	190		$	190
C1		75			94
C2		75			94
C3		75			94
C4		75

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 18%?

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?