Question

Empire Manufacturing is considering two mutually exclusive projects with the following cash flows. Empire’s cost of capital is 10 percent.

Year                   Project A               Project B

                                    0          (485,000)                     (485,000)

                                    1                     0                      155,000

                                    2                     0                      152,000        

                                    3                     0                      131,000

                                    4                     0                      110,000

                                    5                     0                      108,000        

                                    6      1,000,000                           98,500

a) Compute the NPV, IRR and Payback Period for each project. Assuming the projects were mutually exclusive:

b) If the payback criterion was four years, which project would be chosen?

c) If the hurdle rate was 13% which project would be chosen based on IRR?

d) Which project would be chosen if NPV was the decision method? Assuming the projects were independent:

e) If the payback criterion was four years, which project would be chosen?

f) If the hurdle rate was 13% which project would be chosen based on IRR?

g) Which project would be chosen based on NPV?

Answer 1

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