Reference no: EM133117129
1. Given the information in the table below, which of the following statements is true? Assume the cost of capital is 12%.
|
Project
|
Initial investment
|
Year 1 Cash flow
|
Year 2 Cash Flow
|
Year 3 Cash Flow
|
Year 4 Cash Flow
|
Year 5 Cash Flow
|
|
A
|
$1,000,000
|
300,000
|
300,000
|
400,000
|
400,000
|
0
|
|
B
|
$1,450,000
|
500,000
|
500,000
|
500,000
|
500,000
|
0
|
|
C
|
$2,500,000
|
750,000
|
0
|
0
|
1,000,000
|
3,000,000
|
a. If these projects are mutually exclusive, only project C should be accepted.
b. Project C has the shortest payback period
c. Project A has the highest IRR.
d. If these projects are independent, only project C should be accepted
e. Project B has the highest NPV.
2. Consider a project with the following cash flows:
|
Year
|
Cash flow
|
|
0
|
+$100
|
|
1
|
-60
|
|
2
|
-60
|
The IRR of the project is ---------% (2 d.p)
If the prevailing interest rate is 12%, should you accept the project?
3. Here are the cash flows for two mutually exclusive projects:
|
Project
|
C0
|
C1
|
C2
|
C3
|
|
A
|
-20,000
|
8,000
|
8,000
|
8,000
|
|
B
|
-20,000
|
0
|
0
|
25,000
|
The IRR of project A is --------%
The IRR of project B is --------%
If the cost of capital is 5%, which project should be accepted? (A/B/Both/Neither)
If the cost of capital is 3%, which project should be accepted? (A/B/Both/Neither)
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