Question

Questions on Mutually Exclusive Equal-length (MEEL) Projects.

The following questions relate to these two projects, each with r_occ = 10.0%. The table shows cash flows for each project.

Project	EOY 0	EOY 1	EOY 2
Proj. A	-100.00	20.00	120.00
Proj. B	-50.00	10.00	80.00

1.What is the BCR of project A? Write your answer to two decimal places.

2.What is the NPV of project A? Write your answer to two decimal places.

3.What is the BCR of Project B? Write your answer to two decimal places.

4.What is the NPV of Project B? Write your answer to two decimal places.

5.If you have an unlimited budget, which project should you choose

Not enough information is provided to answer this question.

Neither.

Project B)

Project A)

They are both equally good.

6.What is your reasoning behind your answer to the above question?

This project adds the most value (wealth) to my firm.

When analysis methods conflict, the projects are assumed to be of equal value

My money will grow at the fastest rate with this project.

This project has the biggest bang for each dollar of cash invested.

7.Why?

This combination gives the highest cumulative IRR

This combination gives the highest total BCR

This set gives the highest total NPV.

This set minimizes costs while providing an overall positive NPV,

8.Payback Method Question.

The payback method is best described as:

D) A and B

C) A method that relies on analysis of GAAP financial statements

B) A method that is good for evaluating low-risk, long-duration projects

A) A DCF Method

E) None of the other mentioned answers

Answer 1

Proj A

Present value of cash inflow = 20 * (1.1)^-1 + 120 * (1.1)^-2 = 117.36

Investment = 100

1) BCR = Discounted Value of Benefits / Discounted value of Costs = 117.36/100 = 1.1736

2) NPV = 117.36-100 = 17.36

Proj B

Present value of cash inflow = 10 * (1.1)^-1 + 800 * (1.1)^-2 = 75.21

Investment = 50

3) BCR = Discounted Value of Benefits / Discounted value of Costs = 75.21/50 = 1.5042

4) NPV = 75.21-50 = 25.21

5) If i Have Unlimited Budget I choose Both projects since NPV of both projects is positive they are both equally good

6) Since NPV of both projects is positive they are both equally good

However Project B Adds more wealth and money will grow at fastest rate and this project has biggest bang for each dollar invested

7) The combination of both project gives highest cumulative IRR because of IRR for both is higher, Higher BCR because both individual BCR is > 1, Highest NPV because of Positive NPV of Both

8) E None of the Above