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F301 PS4_11Spring

# F301 PS4_11Spring - F301 Problem Set 4 Spring 2011 Write...

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F301 Problem Set 4 Spring 2011 Write your answers on a separate sheet of paper. You do not need to return this page. You must show your work in logical sequence in order to receive full credit. To show work, you may show mathematical formulas or calculator inputs. Each question is worth 3 points. 36 points possible. 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

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F301 PS4_11Spring - F301 Problem Set 4 Spring 2011 Write...

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