You are considering two independent projects, project A and project B. the required rate of return is 12 percent on each. The expected free cash flow from each project are as follows.

Year Project A($) Project B ($)

0 -120,000 -120,000

1 25,000 40,000

2 35,000 40,000

3 45,000 45,000

4 55,000 45,000

5 75,000 50,000

In evaluatingthese projects, please answer to the following questions:

a.Briefly compareand contrastthe payback period method,discountedpayback period method, NPV, Pl, and IRR criteria.What are theadvantages anddisadvantages of using each of this methods?

b.If you require a three-yearpayback for both the traditionaland the discounted payback

period methods before an investment can be accepted, which projects would be accepted under each criterion?

c.Calculate the net present value, the profitabilityindex,and the internalrate of return for each of these projects. Should they be accepted?

d.What would happened to the net present value and profitabilityindex for each project if

the required rate of return increased?If the required rate of return decreased?

e.Calculate the modified internal rate of return for each project. Should they be accepted?

Do you feel it is a better evaluationtechnique thanis the internalrate of return? Why or why not?

3.You have developedthefollowinganalyticalincome statementfor your corporation.It represents the most recent year's operations, which ended yesterday. Yoursupervisor in the controller'soffice has just handed youa memorandumasking for writtenresponses to the following questions:

Sales$30,000,000

Variable cost13,500,000

Revenue before fixed costs$16,500,000

Fixed costs8,000,000

EBIT8,500,000

Interest expense1,000,000

Earningsbefore taxes$7,500,000

Taxes (0.35)2,625,000

Net income$4,875,000

a.At this levelof output, what is the degree of operating, financial, and combined leverage? Explain.

b.What is the firm break-even point in sales dollar?

c.If Sales should increaseby 30 percent, by what percent would earnings before taxes

(and net income) increase?