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 fiveyear 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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 Spring '12
 T
 Net Present Value, 10%, 9%, 12%, capital budgeting decisions, 14.77%

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