Consider the following two projects: Net Cash Flow Each Period ...

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Consider the following two projects:
 
  Net Cash Flow Each Period
  Initial Outlay 1 2 3 4
  Project A 4,000,000 2,003,000 2,003,000 2,003,000 2,003,000
  Project B 4,000,000 0 0 0 11,000,000
  a. Calculate the net present value of each of the above projects, assuming a 14 percent discount rate.
  b. What is the internal rate of return for each of the above projects?
  c. Compare and explain the conflicting rankings of the NPVs and IRRs obtained in parts a and b above.
  d. If 14 percent is the required rate of return, and these projects are independent, what decision should be
  made?
  e. If 14 percent is the required rate of return, and the projects are mutually exclusive, what decision should be
  made?

Question 2

An ordinary annuity may be defined as:
 
  A) A series of equal payments made at regular intervals that are paid at the beginning of each period.
  B) A series of payments, which may or may not be equal in value, that are received at regular intervals at the end of each period.
  C) A series of equal payments made any time over the course of a year, extending for a period of several years.
  D) Any series of payments that occur in the future.
  E) A series of equal payments made at regular intervals that are received at the end of each period.

[flexer1n1]

Answer to Question 1

a. NPV of A = 1,836,166 NPV of B = 2,512,883
b. IRR of A = 35.0 IRR of B = 28.78
c. B has more distant cash flows, thus its IRR is less while its NPV is greater. This time disparity is one of IRR's
ranking problems.
d. If these projects are independent, we would accept them both because they each have a positive NPV.
e. If these projects are mutually exclusive, we would select B because it has the highest positive NPV.

Answer to Question 2

E

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Excellent

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