Question

Use the following information about Company Y below to help answer problems 8-9. 

• Today (T=0), Company Y is evaluating Project 1 and Project 2 

• Each project's initial cash outlay and future cash flows are forecasted below 

• Management's primary goal is to maximize firm value by maximizing NPV 

8. Assume the projects are mutually exclusive. Which of the following statements is most likely FALSE:

 a. The projects have the same payback period

 b. If the cost to finance either project is 12%, management should accept both projects

 c. If the cost to finance either project is 15%, management should only accept Project 2 

 d. If the cost to finance either project is 18%, management should only accept Project 1 

 e. If the cost to finance either project is 21%, management should reject both Projects 

9. Assume management has enough capital to accept both projects if desired. Which of the following statements is most likely TRUE: 

a. The projects have the same payback period 

b. If the cost to finance either project is 18%, management should accept both projects 

c. If the cost to finance either project is 18%, management should only accept Project 2 

d. If the cost to finance either project is 15%, management should reject both Projects 

e. If the cost to finance either project is 12%, management should only accept Project 1

Answer 1

8)

a) Projects have same payback period - False

b) As projects are mutually exclusive, they should accept only Project 2- False

c) At 15%, NPV of project 2< NPV of Project 1, so they should accept only project 1 - False

d) At 18%, as NPV of project 2<0, they should accept only project 1 - True

e) At 215, both projects have negative NPV, so they should reject both projects - True

9)

a) False

b) At 18% , management should accept only project 1 as project 2 NPV<0.- False

c) False

d) At 15% , management should accept both projects as they are independent and NPV >0- False

e) At 12%, both projects have NPV >0 and as they are independent, management should accept both projects- False