A firm is considering two projects. Both have an initial investment of $1,000,000 and pay off over the next 5 years in this fashion. The cost of capital is 8 percent.

a. Which of these has a faster payback period?
b. Which of these options has a higher net present value?
c. Which of these options has a higher internal rate of return (IRR)?

Transcribed Image Text:

Year Year O Year 1 Year 2 Year 3 Year 4 Year 5 Option 1 - 1,000,000 1,000,000 100,000 200,000 300,000 400,000 Option 2 -1,000,000 500,000 500,000 400,000 300,000 200,000