What is Tom best alternative and Why

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Reference no: EM131927449

Advanced Financial Management Homework

Q1. Consider the following two mutually exclusive projects: A and B. Both projects require an annual rate of return of 15%. The cash flows for the two projects are as below:

Year	Project A	Project B
0	-600,000	-1,800,000
1	270,000	1,000,000
2	350,000	700,000
3	300,000	900,000

1) Calculate the IRR (using the Excel function, "=IRR") for each project. Based on the IRR, which one should be your choice?

2) Calculate the NPV for each project, using your calculator (please also use the Excel function to double check your result). Based on the NPV rule, which one should you recommend?

3) Is there a conflict between the two rules? If yes, which project should be taken?

Q2. Tom is considering three different investment plans--A, B, and C--that his broker has offered to him. Each plan requires the same amount of investment but provides different cash flows as follows:

End of Year	A	B	C
1	$200	0	$500
2	200	0	0
3	200	0	0
4	200	200	500
5	0	200	0
6	0	200	0
7	0	200	0
8	0	200	500

Because Tom only has enough savings for one investment, his broker has proposed the third alternative to be, according to his expertise, "the best in town." However, Tom questions his broker's recommendation and asks you for help. The required rate of return for the three investments is the same: 10%. What is Tom's best alternative? Why? [Hints: Compare the PV of the future cash flows.]

Reference no: EM131927449

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