Question

You have been given the responsibility of deciding between 2 projects. Your company cannot do both of them. The projects both have 4-year lives, no residual value and generate cash flows as per the following table. The cost of capital is 8%.

0

1

2

3

4

Project A

($50,000)

$25,000

$20,000

$5,000

$39,000

Project B

($40,000)

$10,000

$30,000

$22,000

$7,000

Which of the following statements is true?a) A has a better NPV, IRR and PBPb) A has a better IRR, a better NPV, but the PBP is longerc) B has a better NPVd) B has a better NPV, IRR and PBPe) B has a better IRR, a better PBP, but the NPV isn’t quite as good

Answer #1

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opportunities. Both require the same initial investment of $11.0
million. Investment A will generate $2.40 million per year
(starting at the end of the first year) in perpetuity. Investment B
will generate $1.70 million at the end of the first year, and its
revenues will grow at 3.2% per year for every year after that.
Which investment has the higher IRR ?
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6.40%
$ 22.6 million
Project B
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1.- You are choosing between two projects. The cash flows for
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Project
Year 0
Year 1
Year 2
Year 3
Year 4
A
−$48
$26
$19
$19
$15
B
−$101
$22
$42
$48
$61
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b. If your discount rate is 5.1%, what are the NPVs of the
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Fiat, a big European
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Project
A
Project B
Year
Cash
Flow
Cash Flow
0
-€50,000
-€30,000
1
15,000
8,000
2
20,000
12,000
3
40,000
18,000
4
25,000
12,000
The company’s weighted
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Question 1
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Project
A
Project B
Year
Cash Flow Cash Flow
1
10,000
8,000
2
15,000
12,000
3
20,000
20,000
4
20,000
15,000
The company's weighted
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Year
Cash Flow
Year
Cash Flow
0
-$40,000
0
-$51,173
1
$35,000
1
$18,400
2
$27,000
2
$14,750
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