Question

1.

A. Which of the following mutually exclusive projects should be accepted?

Project	NPV	Payback	IRR
A	+42,176	2 years, +$10,500	16.4%
B	+39,090	2 years, +9,670	15.8%
C	+41,894	3 years, +16,620	13.2%
D	+43,778	3 years, +11,625	14.9%
E	+38,952	2 years, +15,475	15.9%

B. What is the Payback Period of a project with an initial cost of $75,000, Year 1 cash flow of $20,000 which increases by 5% each year? If the Payback cutoff is 3 years, should the project be accepted?

Multiple Choice

• 4 years; Yes

• 4 years; No

• 3 years; Yes

• 3 years; No

• 5 years; no

C. What is the IRR of the project in Q7-3?

Multiple Choice

• 10.95%

• 9.76%

• 11.55%

• 16.40%

• 13.00%

D. Which of the following is FALSE about IRR?

Multiple Choice

• It ALWAYS returns a more reliable result than the Payback Period method.

• Unlike NPV, it's result is expressed as a percentage.

• It is completely unusable when non-conventional cash flows are present.

• It is a better reporting tool than decision-making tool.

• When looking at mutually exclusive projects, it may give a different decision indication than NPV, and should not be used to make the project decision, but you can report the IRR of the project you have chosen through the NPV method.

Answer 1

1)

When projects are mutually exclusive, project with highest positive NPV will maximise firm value.

Hence, correct option is Project D

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