1. Suppose your firm is choosing between two new product lines. One project has an initial investment of $450 million and offers annual cashflows of $160 million for 5 years. The other has an initial investment of $1,560 million and offers annual cashflows of $475 million for 5 years. 
   1. Using the payback period, which project would you suggest? (2 points)
   2. If your cost of capital is estimated to be 7%, which project offers the higher NPV? (4 points)
   3. What is the IRR of each project? If you used the IRR, which project would you select? (4 points)
   4. What is the cross-over rate for these projects? Which project is preferred below that rate? Which project is preferred above that rate? (10 points)
   5. Plot the NPV profile for these projects. (Hint: use the NPV at 7%, the crossover rate, and the IRRs) (5 points)

Answer rating: 100% (QA)

To answer these questions we first calculate the payback period for each project The first project has an initial investment of 450 million and annual ... View the full answer