Question
Questions 13-16 refer to the following information. There are two independent investment projects for the Galactic...
Questions 13-16 refer to the following information.
There are two independent investment projects for the Galactic Empire. Project A (build TIE Fighters) costs the Empire $300,000 to set up, and it will provide annual cash inflows of $70,000 for 7 years. Project B (build Death Star) costs the Empire $1,000,000 to set up, and it will provide annual cash inflows of $255,000 for 6 years. The Empire’s cost of capital (i.e., the required return on investment) is 10% annually, and the Empire requires the initial investments in those projects be fully paid back within 4 years, or it will run out of cash by then.
13. Based on the NPV rule alone, what project(s) should the Empire accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.
14. Based on the IRR rule alone, what project(s) should the Empire accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.
15. Based on the Payback rule alone, what project(s) should the Empire accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.
16. Based on your answers to Q13-15, what project(s) should the Empire finally choose?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.
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