Reference no: EM132554040

Question 1. Sterling Pharmacy has been presented with an investment opportunity which will yield cash flows of $30,000 per years in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. What happens to the discounted payback period for this investment, if the cash flow in years 1 through 4 change to $25,000?

a. Discounted payback increases

b. Discounted payback decreases

c. Discounted pay back does not change

Question 2. As the director of capital budgeting for Sterling Pharmacy, you are evaluating two mutually exclusive projects with the following net cash flows. The flows are in order of year 0, 1, 2, 3, and 4.

Project X: -$100,000, $500,000, $40,000, $30,000, $10,000

Project Z: -$100,000, $10,000, $30,000, $40,000, $60,000

If Sterling's cost of capital is 15%, which project would you choose?

a. Neither project

b. Project X, since it has the higher IRR

c. Project Z, since it has the higher NPV

d. Project X, since it has the higher NPV

e. Project Z, since it has the higher IRR