The Hang Seng University of Hong Kong Department of Economics and Finance FIN2001 Financial Management Supplementary Exercise 7 (Topic 8) Mark: /12 Consider the following two mutually exclusive projects available to you: Year Cash Flow (A) -$ 240,000 Cash Flow (B) - $ 270,000 0 200,000 50,000 100,000 100,000 50,000 300,000 Whichever project you choose, if you require a 10 percent return on your project. 1. If you apply the payback criterion, which project will you choose? Why? (4 marks) 2. If you apply the net present value (NPV) criterion, which project will you choose? Why? (4 marks) 3. Suppose the required return increases to 20 percent. If you apply the NPV criterion, will the choice of project change? Explain (4 marks)