Question

Projects A and B, both of equal risk, are mutually exclusive alternatives for expanding Corporation’s capacity. The firm’s cost of capital is 13%. The cash flows for each project are shown in the following table.

                                    Project A                                              Project B

                        Year 0:             ($80,000)                      Year 0:             ($80,000)

                        Year 1:             $15,000                        Year 1:             $15,000

                        Year 2:             $20,000                        Year 2:             $15,000

                        Year 3:             $25,000                        Year 3:             $15,000

                        Year 4:             $30,000                        Year 4:             $35,000

                        Year 5:             $30,000                        Year 5:             $25,000

            A.        What is each project’s payback period?

            B.         What is each project’s net present value?

            C.         What is each project’s internal rate of return?

            D.        Which project should Corporation accept and why? Explain.

Answer 1