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Solution Library
Evaluate Projects with Cash Flows
Question
Your company’s cost of capital is 12%. You are currently evaluating three projects that have the following cash flow streams:
|
|
Cash Flows at Time t |
||||
|
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.
Summary
The question belongs to Finance and it is about evaluating three projects A, B and C with cash flows. The payback period, discounted payback period, IRR and NPV for each of the projects have been calculated.
Total Word Count 217
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