Question
Year Project A (upgrade existing B-Wings) Project B (develop new X-Wings) 0 -$250,000 -$400,000 1 $100,000 $50,000 2 $80,000 $70,000 3 $60,000 $80,000 4 $40,000
| Year | Project A (upgrade existing B-Wings) | Project B (develop new X-Wings) |
| 0 | -$250,000 | -$400,000 |
| 1 | $100,000 | $50,000 |
| 2 | $80,000 | $70,000 |
| 3 | $60,000 | $80,000 |
| 4 | $40,000 | $120,000 |
| 5 | $20,000 | $200,000 |
The above are two mutually exclusive investment projects for Rebel Alliance. The Alliance requires getting their invested amount fully paid back within 5 years. The Alliances cost of capital (i.e., the required return on investment) is 6% annually.
1. Based on the Payback rule alone, what project(s) should the Alliance accept?
- Project A only.
- Project B only.
- Both Projects A and B.
- Neither Project A or B.
2. Based on the NPV rule alone, what project(s) should the Alliance accept?
- Project A only.
- Project B only.
- Both Projects A and B.
- Neither Project A or B.
3. Based on the IRR rule alone, what project(s) should the Alliance accept?
- Project A only.
- Project B only.
- Both Projects A and B.
- Neither Project A or B.
4. Based on your answers to Q8-10, what project(s) should the Alliance accept?
- Project A only.
- Project B only.
- Both Projects A and B.
- Neither Project A or B.
5. At what discount rate would the Alliance be indifferent between the two projects?
- 4%.
- 5%.
- 6%.
- 7%
- 8%.
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Intermediate Financial Management
Authors: Brigham, Daves
10th Edition
