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Use the following information regarding two mutually exclusive projects to answer the following five questions: Option 1: This investment will cost you $35,000 today. You
Use the following information regarding two mutually exclusive projects to answer the following five questions:
Option 1: This investment will cost you $35,000 today. You expect to receive $15,000 in Year 1, $28,000 in Year 2, and $3,500 in Year 3.
Option 2:
This investment will cost you $18,000. You expect to receive $14,000 in Year 1, -$2,500 in Year 2, and $7,500 in Year 3.
The discount rate on both projects is 20.0%.
- What are the payback periods for each project? If your cutoff is projects that pay back in 2 years, which project should you accept?
- What is the IRR for each project? Which project should you accept?
- What is the NPV for each project? Which project should you accept?
- What is the IRR on the incremental cash flows? Which project should you accept?
- What is the Profitability Index for each project? Which project should you accept?
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