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.

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