Problem 1

Assume a company is considering two independent projects, Project A and Project B.  Cash outlay for Project A is $14,000. Cash outlay for Project B is $20,000. Company’s cost of capital is 12%. The following table shows after-tax cash flows.  For each project, find out the NPV, the IRR, the MIRR, and indicate accept/reject decision.

Year    Project A    Project B
1         $4800         $6700
2         $4800         $6700
3         $4800         $6700
4         $4800         $6700

Problem 2

Assume a company is considering two investment projects. Both projects need an upfront expenditure of $30 million. The company estimates that cost of capital is 10% and that the investments would result in the following after-tax cash flows (in millions of dollars). Complete parts (a) through (e) below.

Year    Project A    Project B
1          $28             $10
2          $20             $15
3          $10             $20
4           $5              $25

a) Determine the regular payback period for each project.

b) Determine the discounted payback period for each project.

c) Suppose that the two projects are independent and cost of capital is 10%. Which project or projects must the company undertake? Base your results on the NPV.

d) Suppose that the two projects are mutually exclusive and the cost of capital is 5%. Which project or projects should the company undertake? Base your results on the MIRR.

e) Describe why quantitative measures might not always be the best way to evaluate a project.