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Question
Consider the following two projects:Net Cash Flow Each Period
| Initial Outlay | 1 | 2 | 3 | 4 |
| Project A $4,000,000 | $2,003,000 | $2,003,000 | $2,003,000 | $2,003,000 |
| Project B $4,000,000 | 0 | 0 | 0 | $11,000,000 |
a. Calculate the net present value of each of the above projects, assuming a 14 percent discount rate.
b. What is the internal rate of return for each of the above projects?
c. Compare and explain the conflicting rankings of the NPVs and IRRs obtained in parts a and b above.
d. If 14 percent is the required rate of return, and these projects are independent, what decision should be made?
e. If 14 percent is the required rate of return, and the projects are mutually exclusive, what decision should be made?
Answer
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