Question
Use the following information, Assume that the projects are mutually exclusive. Year Cash Flow (A) Cash Flow (B) 0 ($525,600) ($425,600) 1 $323,100 $235,900 2
Use the following information, Assume that the projects are mutually exclusive.
| Year | Cash Flow (A) | Cash Flow (B) |
| 0 | ($525,600) | ($425,600) |
| 1 | $323,100 | $235,900 |
| 2 | $180,200 | $163,900 |
| 3 | $145,000 | $135,000 |
| 4 | $88,220 | $79,000 |
| 5 | $73,699 | $65,000 |
A. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?
B. If the required return is 15 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?
C. Over what range of discount rates would the company choose Project A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.
D. Compute the payback period for each project
E. Compute the profitability index for each project.
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International Finance Theory and Policy
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz
10th edition
978-0133425895, 133425894, 978-0133423631, 133423638, 978-0133423648
