Exam2_practice1

# Exam2_practice1 - Practice Problems for Exam 2 Part I 1...

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Practice Problems for Exam 2 Part I 1. Your company is considering two projects with the following cash flows: Project A Project B Time Cash Flow Cash Flow 0 -22,000 -50,000 1 6,000 20,000 2 7,000 15,000 3 8,000 15,000 4 9,000 13,000 5 10,000 13,000 a) Calculate the IRR for each project. Answer: See attached spreadsheet. b) If these projects are independent , and a required return of 10% is used as the discount rate, identify which project(s) you would accept? Clearly explain the logic behind your decision. Answer: Both. Both have positive NPV and IRR higher than required return. c) If these projects are mutually exclusive, and a required return of 10% is used as the discount rate, identify which project(s) you would accept? Clearly explain the logic behind your decision. Answer: B. Higher NPV at 10%. d) Assume that you can accept only one of the projects (if any are acceptable). Also assume that the CFO is uncertain about what discount rate to use. She is now thinking that perhaps a 14% discount rate is appropriate. Which project would you accept if the required return is 14%?

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