Question

1.-You are evaluating a project that will cost $499,000​, but is expected to produce cash flows of $123,000 per year for 10 ​years, with the first cash flow in one year. Your cost of capital is 10.6% and your​ company's preferred payback period is three years or less.

a. What is the payback period of this​ project?

b. Should you take the project if you want to increase the value of the​ company?

2.- You are choosing between two projects. The cash flows for the projects are given in the following table​ ($ million):

Project	Year 0	Year 1	Year 2	Year 3	Year 4
A	negative $ 48−$48	$ 26$26	$ 19$19	$ 19$19	$ 15$15
B	negative $ 101−$101	$ 22$22	$ 42$42	$ 48$48	$ 61$61

a. What are the IRRs of the two​ projects?

b. If your discount rate is 5.1%​, what are the NPVs of the two​ projects?

c. Why do IRR and NPV rank the two projects​ differently?

Answer 1

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