Question

I will rate, thank you.

Part 1:

Consider projects Alpha and Beta:

Cash Flows ($)
Project	C0	C1	C2	IRR (%)
Alpha	–389,000	242,000	288,999	23
Beta	–199,000	131,500	167,000	30

The opportunity cost of capital is 8%. Suppose you can undertake Alpha or Beta, but not both. Use the IRR rule to make the choice.

Which project did you choose?

	Alpha
	Beta

Part 2:

Consider the following projects:

Cash Flows ($)
Project	C0	C1	C2	C3	C4	C5
A	−2,500	2,500	0	0	0	0
B	−5,000	2,500	2,500	5,500	2,500	2,500
C	−6,250	2,500	2,500	0	2,500	2,500

a. If the opportunity cost of capital is 9%, which project(s) have a positive NPV?

Which are Positive NPV project(s)?

	Project A
	Project B
	Project C
	Projects A and B
	Projects A and C
	Projects B and C
	Projects A, B, and C
	No project

b. Calculate the payback period for each project: (Round your answers to 2 decimal places. If a project never pays back, enter "0".)

Project A	year(s)
Project B	year(s)
Project C	year(s)

c. Which project(s) would a firm using the payback rule accept if the cutoff period were three years?

Project(s) accepted                 

(Click to select)

Project A

Project B

Project C

Projects A and B

Projects A and C

Projects B and C

Projects A, B, and C

No project

d. Calculate the discounted payback for each project. (Do not round intermediate calculations. Round your answers to 2 decimal places. If a project never pays back, enter "0".)

Project A	year(s)
Project B	year(s)
Project C	year(s)

e. Which project(s) would a firm using the discounted payback rule accept if the cutoff period were three years?

Project(s) accepted            

    (Click to select)

Project A

Project B

Project C

Projects A and B

Projects A and C

Projects B and C

Projects A, B, and C

No project

Answer 1

Part 1: Ans: Beta

IRR represents the rate of return given by the Project. A project can be accepted only if the IRR is higher than the Oppurtunity Cost of Capital.

In the given case IRR of the projects are already given, As the IRR of both the projects are above Oppurtunity cost of capital both th projects can be accepted.

Howeve as the is a restriction that only one project can be accepted, as per IRR rule, it is advisable to accept the project with higher IRR.

As Beta is having higher IRR as compared to Alpha, it is advisable to accept Beta.

Part 2: Ans:

Oppurtunity Cost of Capital = 9%

Project	-	A	-	B	-	C	-
Year	PVF @ 9%	Cashflows - A	PV of Cashflow	Cashflows - B	PV of Cashflow	Cashflows - C	PV of Cashflow
a	b	c	d = c * b	e	f = e * b	g	h = g * b
0	1	-2500	-2500	-5000	-5000	-6250	-6250
1	0.9174	2500	2293.5	2500	2293.5	2500	2293.5
2	0.8417	0	0	2500	2104.25	2500	2104.25
3	0.7722	0	0	5500	4247.1	0	0
4	0.7084	0	0	2500	1771	2500	1771
5	0.6499	0	0	2500	1624.75	2500	1624.75
-	NPV	A	-206.5	B	7040.6	C	1543.5

a. Projects with Positive NPV = Projects B and C

Project	A	-	B	-	C	-
Year	Cashflows - A	Cummulative Cashfow	Cashflows - B	Cummulative Cashfow	Cashflows - C	Cummulative Cashfow
0	-2500	-2500	-5000	-5000	-6250	-6250
1	2500	0	2500	-2500	2500	-3750
2	0	0	2500	0	2500	-1250
3	0	0	5500	5500	0	-1250
4	0	0	2500	8000	2500	1250
5	0	0	2500	10500	2500	3750

(b)

Payback Period of Project A = 1 Year

Payback Period of Project B = 2 Years

Payback Period of Project C = 3 Years + (2500/1250) = 3.5 Years

(c) If Cut off is 3 years: Only those projects with Payback period lessthan 3 years can be accepted.

Hence, Projects A and B can be accepted.

(d)

Project	-	A	-	-	B	-	-	C	-	-
Year	PVF @ 9%	Cashflows - A	PV of Cashflow	Cummulative PV of Cashflow	Cashflows - B	PV of Cashflow	Cummulative PV of Cashflow	Cashflows - C	PV of Cashflow	Cummulative PV of Cashflow
a	b	c	d = c * b	-	e	f = e * b	-	g	h = g * b	-
0	1	-2500	-2500	-2500	-5000	-5000	-5000	-6250	-6250	-6250
1	0.9174	2500	2293.5	-206.5	2500	2293.5	-2706.5	2500	2293.5	-3956.5
2	0.8417	0	0	-206.5	2500	2104.25	-602.25	2500	2104.25	-1852.25
3	0.7722	0	0	-206.5	5500	4247.1	3644.85	0	0	-1852.25
4	0.7084	0	0	-206.5	2500	1771	5415.85	2500	1771	-81.25
5	0.6499	0	0	-206.5	2500	1624.75	7040.6	2500	1624.75	1543.5

(d)

As the net PV of Cashflow is negative for Project A, it is not completely paid back, Hence, there wil be no Discounted Paybeck period for Project A. = 0

Discounted Payback Period for Project B = 2 Years + (4,247.1 / 602.25) = 2.14 Years

Discounted Payback Period for Project C = 4 Years + (81.25 / 1624.75) = 4.05 Years

(e)

If Cut off is 3 years: Only those projects with Discouted Payback period lessthan 3 years can be accepted.

Hence, Projects B can be accepted