Problem
Your division is considering two investment projects, each of which requires an up-front expenditure of $50 million. You estimate that the cost of capital is 11% and that the investments will produce the following after-tax cash flows
|
Year
|
Project A
|
Project B
|
|
1
|
8
|
27
|
|
2
|
15
|
22
|
|
3
|
22
|
10
|
|
26
|
6
|
I. What is the regular payback period for each of the projects?
II. What is the NPV and IRR for each projects?
III. If the two projects are independent and the cost of capital is 11%, which project or projects should the firm undertake and why?
IV. If the cost of capital is 8.5%, would your decision change from part III?