For problems 1-4, use the following cash flows for projects A and B:
Years: 0 1 2 3 4
Project A: (-$2000, $600, $700, $800, $900)
Project B: (-$2000, $300, $400, $850, $950)
1. Calculate the payback period for projects A and B.
2. Calculate the internal rate of return for projects A and B.
3. If only one project can be chose and the required rate of return is 5%, which should be accepted? Why? (Use NPV for your analysis.)
4. If only one project can be chosen and if the discount rate is 12%, which project should be accepted? Why? (Use NPV for your analysis.)
5. Consider the following abbreviated financial statements for a proposed investment:
|
Year
|
0
|
1
|
2
|
3
|
4
|
|
Gross Book Value
|
$160
|
$160
|
$160
|
$160
|
$160
|
|
Accumulated Dep.
|
|
40
|
80
|
120
|
160
|
|
Net Book Value
|
$160
|
$120
|
$80
|
$40
|
$0
|
|
|
|
|
|
|
|
|
Sales
|
|
$95
|
$90
|
$97
|
$80
|
|
Costs
|
|
33
|
30
|
25
|
10
|
|
Depreciation
|
|
40
|
40
|
40
|
40
|
|
Taxes (50%)
|
|
$11
|
$10
|
$16
|
$15
|
|
Net Income
|
|
$11
|
$10
|
$16
|
$15
|
What is the average accounting return (AAR) for proposed investment? This project will use straight-line depreciation.
6. A firm is considering the following two investment projects. Project A requires an initial outlay of $500 and will return $120 per year for the next seven years. Project B requires an initial outlay of $5,000 and will return $1,350 per year for the next five years. The required rate of return is 10%. Use the net present value criterion to determine which investment is preferable if only one project can be chosen. Why?
7. Calculate the internal rate of return for each of the projects described in the previous problem.
8. Calculate the profitability index for each of the investments described in the previous problem.