Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0-$350,000 - $35,000 125,000 17,000 2 70,000 11,000 3 70,000 17,000 4 430,000 11,000 Assume you require a 15 percent return on your investment and a payback of 4 years. a. If you apply the discounted payback criterion, which investment will you choose? Why? (6 points) b. If you apply the NPV criterion, which investment will you choose? Why? (6 points) c. Based on your answers in (a) and (b), what you can say anything about the IRR of both projects? which project will you finally choose? Why? 6:35 pm

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Consider the following two mutually
exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0-$350,000 - $35,000
125,000 17,000
2 70,000 11,000
3 70,000 17,000
4 430,000 11,000
Assume you require a 15 percent return
on your investment and a payback of
4 years.
a. If you apply the discounted payback
criterion, which investment will you
choose?
Why? (6 points)
b. If you apply the NPV criterion, which
investment will you choose? Why? (6
points)
c. Based on your answers in (a) and
(b), what you can say anything about
the IRR of
both projects? which project will you
finally choose? Why?
6:35 pm
Transcribed Image Text:Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0-$350,000 - $35,000 125,000 17,000 2 70,000 11,000 3 70,000 17,000 4 430,000 11,000 Assume you require a 15 percent return on your investment and a payback of 4 years. a. If you apply the discounted payback criterion, which investment will you choose? Why? (6 points) b. If you apply the NPV criterion, which investment will you choose? Why? (6 points) c. Based on your answers in (a) and (b), what you can say anything about the IRR of both projects? which project will you finally choose? Why? 6:35 pm
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