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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.

8. Based on the Payback rule, what project(s) should the Alliance accept?

Project A only.

Project B only.

Both Projects A and B.

d..

9. Based on the NPV rule, what project(s) should the Alliance accept?

a.Project A only.

b.Project B only.

c.Both Projects A and B.

d.Neither Project A or B.

10. Based on the IRR rule, what project(s) should the Alliance accept?

Project A only.

Project B only.

Both Projects A and B.

Neither Project A or B.

11. 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.

12. At what discount rate would the Alliance be indifferent between the two projects?

a.4%.

b.5%.

c.6%.

d.7%

e.8%.

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