Question

10 points QUESTION 10 Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) -$27,476 9,057 10,536 11,849 13,814 -$318,844 0 1 27,700 56,000 55,000 399,000 4 The required return is 15 percent for both projects. Which one of the following statements related to these projects is correct? 1.The IRR decision rule should be used as the basis for selecting the project in this situation 2. The profitability rule implies accepting Project A. 3. Only NPV implies accepting Project A. 4 Because both the IRR and the Pl imply accepting Project B, that project should be accepted. 5. NPV, IRR, and Pl all imply accepting Project A.

Answer 1

Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 15% and t is the time period in years.
Profitability index (PI) = (Sum of present values/Initial investment)
Net present value (NPV) = initial investment + sum of present values
Use excel to find the Internal rate of return (IRR)
Project A
t	0	1	2	3	4
Cash flow	-318844	27700	56000	55000	399000
Present value		24086.96	42344.05	36163.39	228129.5
Sum of present values	330723.9
PI	1.037259
Net present value	11879.94
Internal rate of return	16.24%
Project B
t	0	1	2	3	4
Cash flow	-27476	9057	10536	11849	13814
Present value		7875.652	7966.73	7790.91	7898.199
Sum of present values	31531.49
PI	1.147601
Net present value	4055.491
Internal rate of return	21.61%
Based on the calculations, the following statement is true.
3) Only NPV rule implies accepting Project A.