1. You are considering the following two mutually exclusive projects. The requir

Question

1. You are considering the following two mutually exclusive projects. The required rate of return is 14.6 percent for project A and 13.8 percent for project B. Which project should you accept and why (find their NPVs)?

2. Cool Water Drinks is considering a proposed project with the following cash flows. Should this project be accepted based on the combined approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 12.6 percent? Why or why not?

3. You are considering a project with an initial cost of $7,800. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively?

Year Project A Project B 0 -$50,000 -$50,000 1 24,800 41,000 2 36,200 20,000 3 21,000 10,000

Explanation / Answer

Net Present Value= Cash Inflows- Cash Outflows

Cash Inflows= Cash Flow(PVAF, Rate, Life)

NPV Project A= 24800*.878+36200*.772+21000*.678-50000

NPV= 63960-50000 = $ 13960

Project B NPV=41000*.878+20000*.772+10000*.678-50000

= 58218-50000 = $8220

Project A should be selected as the Net Present Value of Project A is higher than the Project B.

3. Year Cash Flow Cum Cash Flow

0 -7800 -7800

1 1100 6700

2 1640 5060

3 3800 1260

Payback Period = 3years+1260/4500 = 3.28 Years Approximately

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