The expected future cash flows have already been

This preview shows page 16 - 18 out of 18 pages.

The projects have equivalent risk and the appropriate discount rate is 14%. The expectedfuture cash flows have already been computed, they are as follows:YearProject AProject B0-100-15013045240603507516
4406053060Which project would you select based on:a) Payback Methodb) Discounted Paybackc) Net Present Value Methodd) Internal Rate of Returne) Modified IRRf) Profitability IndexBased on your answers above, which project would you recommend to your firm?Example 10: Real Estate Solutions, Inc., has identified the following two mutually exclusive projects:YearCash Flow (A)Cash Flow (B)0-12,500-12,00014,0001,00025,0006,00036,0005,00041,0004,000a. Sketch the NPV profiles for each project.b.What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct?c.If the required return is 6%, what is the NPV for each of these projects? Which project will you choose if you apply the NPV decision rule?d.Over what range of discount rates would you choose Project A? Project B? At what discount rate are you indifferent between these two projects? Explain.Example 11: Consider the following cash flows on two mutually exclusive projects that require an annual return of 15%. Working in the financial planning department for the Bahamas Recreation Corp., you are trying to compare different investment criteria to arrive at a sensible 17
choice of these two projects.YearDeepwaterFishingNew SubmarineRide0-$600,000-$1,800,0001270,0001,000,0002350,000700,0003300,000900,000a)Based on the payback method, which project should be chosen?b)Based on the discounted payback method, which project should be chosen?c)If you decision rule is to accept the project with a greater IRR, which project would you chose?d)What is the NPV for each project? Using the NPV rule, which project should be chosen?e)Sketch the NPV profiles for these projects.f)What is the crossover rate for these two projects?g)Based on the Profitability Index, which project should be chosen?18

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture