Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:Q4: Consider the following two mutually exclusive projects, you require a 15 percent return on
your investment:
Year
Cash Flow (A)
Cash Flow (B)
-18,000
10,000
-170,000
10,000
25,000
25,000
380,000
1
6,000
10,000
3
4
8,000
a) If you apply the payback criterion, which investment will you choose? Why?
b) If you apply the discounted payback criterion, which investment will you choose? Why?
c) If you apply the NPV criterion, which investment will you choose? Why?
d) If you apply the IRR criterion, which investment will you choose? Why?
e) If you apply the profitability index criterion, which investment will you choose? Why?
f) Based on your answers in (a) through (e), which project will you finally choose? Why?
g) What is the relationship between IRR and NPV? Are there any situations in which you
might prefer one method over the other? Explain
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