Problems Set for Session Nine

Problem 1

Madeleine Blanger company is considering Projects A and B with the fllwinginformation:

Cashflows

Year

Project A

Project B

19X0

S4,000 (initial investment)

S4,000 (initial investment) _

19X1

800

800

19X2

800

4,800

19X3

4,800

a.

If Madeleine's cost of capital is 15 percent, rank the projects on the basis of the IRRcriterion.

b.

Why should Madeleine not choose between the projects on the basis of the RRranking determinated in a ?

c What general conclusion can be drawn from your explanation in part b ?