Question #1

Consider the following potential investment, which has the same risk as the firms other projects:

Time	Cash Flows
0	($300,000)
1	$74,000
2	$78,000
3	$80,000
4	$85,000
5	$85,000
6	$90,000

1-A: What are the investments payback period, IRR, and NPV, assuming the firms WACC is 13%?

1-B: If the firm requires a payback period of less than 3.5 years, should this project be accepted? Be sure to justify your choice.

1-C:Based on the IRR and NPV rules, should this project be accepted? Be sure to justify your choice.

1-D:Which of the decision rules (payback, NPV, or IRR) do you think is the best rule for a firm to use when evaluating projects? Be sure to justify your choice.

Question #2

Your company is interested in having a new facility constructed. The contractor expects that it will take approximately 3 years to complete the building. The contractor has offered you three payment plans for the building. They are as follows:

Time	Plan 1	Plan 2	Plan 3
Today	$2,400,000	$3,600,000	$0
1 year from now	$7,800,000	$0	$13,050,000
2 years from now	$7,800,000	$11,400,000	$0
3 years from now	$7,800,000	$11,400,000	$13,050,000

The CFO of your company has asked you to provide recommendation concerning which payment plan to accept. What is your recommendation? Assume your weighted-average cost of capital is 12%.