Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.

			Project A		Project B
			-$130,000.00		-$85,000.00
Initial Investment (CF0)
Year (t)			Cash Inflows (CFt)
1			$25,000		$40,000
2			$35,000		$35,000
3			$45,000		$30,000
4			$50,000		$10,000
5			$55,000		$5,000

Project A						Project B
Year	Cash Flow Stream		Cumulative Cash Flow			Year	Cash Flow Stream		Cumulative Cash Flow
0	-130,000		-130,000			0	-85,000		-85,000
1	25,000		-105,000			1	40,000		-45,000
2	35,000		-70,000			2	35,000		-10,000
3	45,000		-25,000			3	30,000		20,000
4	50,000		25,000			4	10,000		30,000
5	55,000		80,000			5	5,000		35,000
Total	80,000					Total	35,000
Payback period (PBP) = Numerical Value of the last year with negative cash flow + (Absolute value of that negative cash flow / Total cash flows of the next year)
												Project A = 3+(25,000/50,000)						Project B = 2+(10,000/30,000)
3.5						2.33
Years is the payback period for Project A						Years is the payback period for Project B

Question B

If the return on the market portfolio increased by 12%, what change would you expect in return for each stock?

Question C

If the return on the market portfolio decreased by 5%, what change would you expect in return for each stock?

Question D

If you believed the stock market was getting ready to experience a significant decline, which stock would you probably add to your portfolio? Why?

Question E

If you anticipated a major stock market rally, which stock would you add to your portfolio? Why?