Question 3

1. Your investment capital is limited to $10, so the capital must be rationed. In which of the following projects should you invest?

		Cash Flows
Project		C0	C1	C2	NPV @ 10%	Profitability Index
X		-10	30	5	21.4	2.1
Y		-5	5	20	16.07	3.2
Z		-5	5	10	7.81	1.6
	A.	Invest in Y and Z because the total NPV is higher than investing in X.
	B.	Invest in only Y because you don't have enough to invest in X and Y.
	C.	Invest in only Y because the profitability index of Z is lower than that of Y.
	D.	Invest in only X because it has a higher NPV than Y.

Question 4

1. An investment of $90 today is expected to return $110 in one year. The risk-free rate for one year is 4% and the risk premium for projects of equivalent risk is 6%. What is the project IRR?

	A.	10%
	B.	6%
	C.	More than 20%
	D.	4%
	E.	20%