U 118.18% Illustration 2 A firm must choose from six independent capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent per year. Project IRR, % 19 17 Initial investment, $ 200,000 400,000 250,000 200,000 150.000 400,000 16 NPV, S 100,000 20,000 60,000 - 5,000 50,000 150,000 12 20 15 8) See illustration 2, if the firm is using the Profitability Index approach to ranking these projects, which project(s) should the firm accept? a) 1, 2, 3, 5, and 6 b) 1, 2, 3, and 5 c) 2, 3, 4, and 6 d) 1, 3, 5, and 6 9) What is the IRR for the following project if its initial after-tax cost is $4,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and $1,300,000 in vear 4? a) 15.57% b) 25.87% c) 13.57% d) 12.25% 10) A firm with a weighted average annual cost of capital of 16 percent is evaluating three mutually exclusive capital budgeting projects. The internal rates of return of these projects are as follows: Project 2 Project 1 14% Project 3 13% 15% IRR The firm should a) accept all projects b) accept Project 2, and reject Projects 1 and 3 c) accept Project 3, and reject Projects 1 and 2 d) reject all projects