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?
1)
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