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In: Finance

We have the following two projects: Year Project X     Project Y 0   -29,500....... -45,000 1   9,000...

We have the following two projects:

Year Project X     Project Y

0   -29,500....... -45,000

1   9,000 ...............0

2   9,000............... 0

3   9,000 .............. 0

4   9,000 ...............0

5   9,000........... $84,000

a) Show each project on the time-line.

b) What is payback period? What are payback period values for projects X & Y? How do you interpret them? Given a threshold of 3 years which project or projects should you choose if they are independent? What if they are mutually exclusive?

c) The cost of capital is 10%. What are these projects' NPVs? Which project(s) should be chosen based on NPV if they are independent? What if they are mutually exclusive?

d) What are these projects' approximate IRRs? Which project(s) should be chosen based on IRR if they are independent? What if they are mutually exclusive?

e) Draw the NPV profiles for these two projects? Explain the use NPV-profiles. Do you see any conflict of choice between NPV and IRR between these two projects? How do you resolve the conflict if there is one, in other words, do you use NPV or IRR and why? What could be the reasons or conditions that may result in conflict to arise between NPV and IRR.

Solutions

Expert Solution

jeff jeffy answered 2 years ago
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