Question

1. Compute the payback period for each project.


a. Explain the rationale behind the payback method.
b. State and explain the decision rule for the payback method.
c. Explain how the payback method would be used to rank mutually exclusive projects.
d. Comment on the advantages and shortcomings of this method.
2. Compute the discounted payback period for each project using a discount rate of 10%.
a. Explain the rationale behind the discounted payback method.
b. Comment on the advantages and shortcomings of this method.
3. Compute the net present value (NPV) for each project. BioCom uses a discount rate of 9% for projects of average risk.
a. Explain the rationale behind the NPV method.
b. State and explain the decision rule behind the NPV method.
c. Explain how the NPV method would be used to rank mutually exclusive projects.
d. Comment on the advantages and shortcomings of this method.
e. Without performing any calculations, explain what happens to NPV if the discount rate is adjusted upward for projects of higher risk or downward for projects of lower risk.
4. Compute the internal rate of return (IRR) for each project.
a. Explain the rationale behind the IRR method.
b. State and explain the decision rule behind the IRR method. Assume a hurdle rate of 9%.
c. Explain how the IRR method would be used to rank mutually exclusive projects.
d. Comment on the advantages and shortcomings of this method.
5. Compute the modified internal rate of return (MIRR) for each project.
a. Explain the rationale behind the MIRR method.
b. State and explain the decision rule behind the MIRR method. Assume a hurdle rate of 9%.
c. Explain how the MIRR method would be used to choose between mutually exclusive projects.
d. Explain how this method corrects for some of the problems inherent in the IRR method.
6. Explain to the R & D staff why BioCom uses the NPV method as its primary project selection criterion.
7. Challenge question. Construct NPV profiles for both projects using discount rates of 1% through 15% at one percentage point intervals. At approximately what discount rate does the Nano test tube project become superior to the micro surgery kits? This problem is best solved using an electronicspreadsheet.


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  • CreatedMay 08, 2014
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