Question

Use the following information for problems 1 to 5. Assume that the projects are mutually exclusive.

Year	Cash Flow (A)	Cash Flow (B)
0	-$37,500	-$37,500
1	$17,300	$5,700
2	$16,200	$12,900
3	$13,800	$16,300
4	$7,600	$27,500

1.         What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

2.         If the required return is 11 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?

3.         Over what range of discount rates would the company choose Project A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.

4.         Compute the payback period for each project.

            5.         Compute the profitability index for each project.

Answer 1

Calculate the IRR, NPV ,Payback period and Profitability index as follows:

Formulas:

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