Home / Questions / Problems 1 9 refer to two projects with the following cash flows Y ear P r oject A P r oje...
Problems 1–9 refer to two projects with the following cash flows:
Y ear P r oject A P r oject B
0 
–$100 
–$100 
1 
40 
50 
2 
40 
50 
3 
40 
50 
4 
40 

1. IRR/NP V . If the opportunity cost of capital is 11 percent, which of these projects is worth pursuing?
2. Mutual l y Exclus i v e I n v estments. Suppose that you can choose only one of these projects.
Which would you choose? The discount rate is still 11 percent.
3. IRR/NP V . Which project would you choose if the opportunity cost of capital were 16 percent?
4. IRR. What are the internal rates of return on projects A and B?
5. I n v estment Criteria. In light of your answers to problems 2–4, is there any reason to be lieve that the project with the higher IRR is the better project?
6. P r o f it a bility Ind e x. If the opportunity cost of capital is 11 percent, what is the profitability index for each project? Does the profitability index rank the projects correctly?
7. P a yback. What is the payback period of each project?
8. I n v estment Criteria. Considering your answers to problems 2, 3, and 7, is there any reason to believe that the project with the lower payback period is the better project?
9. Book Rate of Retu r n. Accountants have set up the following depreciation schedules for the
two projects:
Y ear: 
1 
2 
3 
4 
Project A 
$25 
$25 
$25 
$25 
Project B 
33.33 
33.33 
33.34 

Calculate book rates of return for each year. Are these book returns the same as the IRR?
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