F301 PS4 Solutions_11Spring

F301 PS4 Solutions_11Spring - F301 Problem Set 4 Spring...

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F301 Spring 2011 Page 1 of 2 F301 Problem Set 4 Spring 2011 Use the following information to answer Questions 1 - 4. Company A is considering two possible investment projects. Each is a five-year project. The five years of cash flows for Projects A1 and A2 are as follows. The projects are mutually exclusive. Year 0 1 2 3 4 5 A1 -400,000 222,000 150,000 64,000 44,000 18,000 A2 -400,000 23,000 63,800 110,000 240,000 353,000 1. Compute the straight, undiscounted payback period for each project. If Company A uses the payback period for capital budgeting decisions, which project or projects would be chosen? 2. Compute the IRR for each project. The company's cost of capital (required rate of return) is 10%. If Company A uses IRR for capital budgeting decisions, which project or projects would be chosen? 3. Compute the NPV for each project at 10% required return and also at 15% required return. If Company A uses NPV for capital budgeting decisions, which project or projects would be chosen at each of those discount rates? 4. Suppose the projects were independent. Which project or projects would be accepted at required returns of 10% and 15%? Use the following information to answer Questions 5 - 10. Company B is considering two possible investment projects. Each is a five-year project. The five years of cash flows for Projects B1 and B2 are as follows. The projects are mutually exclusive. Year 0 1 2 3 4 5 B1 -400,000 250,000 160,000 90,000 50,000 30,000 B2 -400,000 25,000 60,000 100,000 200,000 350,000 5. Compute the straight, undiscounted payback period for each project. If Company B uses the payback period for capital budgeting decisions, which project or projects would be chosen? 6. Compute the IRR for each project. The company's cost of capital (required rate of return) is 10%. If Company B uses IRR for capital budgeting decisions, which project or projects would be chosen? 7. Compute the NPV for each project at 10% required return and also at 15% required return. If Company B uses NPV for capital budgeting decisions, which project or projects would be chosen at each of those discount rates? 8. Suppose the projects were independent. Which project or projects would be accepted at required returns of 10% and 15%?
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This note was uploaded on 03/15/2012 for the course BUS-F 301 taught by Professor T during the Spring '12 term at IUPUI.

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F301 PS4 Solutions_11Spring - F301 Problem Set 4 Spring...

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