Tutorial 7 #1: Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain. #2: Mahjong, Inc., has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$43,000 -$43,000 1 23,000 7,000 2 17,900 13,800 3 12,400 24,000 4 9,400 26,000 a. 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? b. If the required return is 11%, what is the NPV for each of these projects? Which project will you choose if you apply the NPV decision rule? c. Over what range of discount rates would you choose Project A? Project B? At what discount rate would you be indifferent between these two projects? Explain. #3: Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$300,000 -$40,000 1 20,000 19,000 2 50,000 12,000 3 50,000 18,000 4 390,000 10,500 Whichever project you choose, if any, you require a 15% return on your investment.
- Winter '14
- Net Present Value