1. Following are the estimated after-tax cash flows for two mutually exclusive projects:
|
Year
|
Project S
|
Project T
|
|
0
|
($16,000)
|
($15,000)
|
|
1
|
14,000
|
2,000
|
|
2
|
6,000
|
18,600
|
The company's required rate of return is 16 per- cent. What is the internal rate of return (IRR) of the project(s) the company should purchase?
2. The CFO of Horatio's Hotels gave three college interns three different independent projects to evaluate. Following are the results of their analyses: The CFO agrees with the final accept/reject de- cision that each intern made. But she spotted an error in the numbers reported by one of the interns. (a) Which intern's report has the error? (b) Does the information given here provide an indication of the firm's required rate of return? Explain your answers.
|
Intern's Name
|
Project's Life
|
NPV
|
IRR
|
Discounted Payback
|
Decision
|
|
Albert
|
7 years
|
$5,300
|
12.0%
|
6.8 years
|
Accept
|
|
Josie
|
6
|
(1,800)
|
8.0
|
5.8
|
Reject
|
|
Kenny
|
10
|
4,500
|
10.0
|
9.6
|
Accept
|