F301 Spring 2011
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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%?