The CFO has asked you to consider the following two projects. The CFO also made subjective risk assessments of each project, and she concluded that both projects have risk characteristics that are similar to the firms average project. The WACC is 10% and estimates of the projects after tax cash-flows (in millions of Tk) are as follows:

Time Project X Project Y

0 -100 -100

1 10 70

2 60 50

3 80 20

1.

a. What is the rationale behind the NPV method?

b. What is each Projects NPV?

c. According to NPV, which project(s) should be accepted if they are;

- independent?

- mutually exclusive?

Marks 7

2.

a. Define the term internal rate of return (IRR).

b. What is each projects IRR?

Marks 4

3.

a. What is the logic behind the IRR method?

b. According to IRR, which project(s) should be accepted if they are ;

- independent?

- mutually exclusive?

Marks 3

4. How is the IRR on a project related to the YTM on a bond?

Marks 2

5. What is the underlying cause of ranking conflicts between NPV and IRR?

Marks 2

6. What is the reinvestment rate assumption, and how does it affect the NPV versus IRR conflict?

Marks 2

7.

a. Define the term modified IRR (MIRR).

b. Find the MIRRs for the Projects.

Marks 3

8.

a. What is the payback period?

b. Find the Discounted payback for the Projects.