Your company's cost of capital is 12%. You are currently evaluating three projects that have the following cash flow streams:
|
Project
|
0
|
1
|
2
|
3
|
4
|
|
A
|
-10,000
|
4,000
|
4,000
|
4,000
|
4,000
|
|
B
|
-10,000
|
0
|
0
|
0
|
50,000
|
|
C
|
-1,000
|
500
|
500
|
500
|
500
|
a. Find the payback period, discounted payback period, IRR, and NPV for each of the three projects.
b. Use the payback period to evaluate options A and B. Which would you choose according to this method? Why does payback period give the wrong answer?
c. Suppose projects A and C are mutually exclusive. Use the IRR to establish which of the two you should undertake. Why does IRR give the wrong answer?
d. Determine whether Project A or C should be undertaken using incremental IRR.