$1.$Consider the case of Company XYZ and answer Questions $1$ to $10.$

Company XYZ has the possibility to undertake two mutually exclusive projects. Project A has a horizon of $5$ years and Project B has a horizon of $4$ years. The initial investment $($CF$0)$ and expected cash flows $($CF$1$ to CF$5)$ at the end of each year are presented in the following table. The opportunity cost of capital of the company is $8\%.$

Project CF$0$ CF$1$ CF$2$ CF$3$ CF$4$ CF$5$

A $-10,0004,0002,5001,5004,5001,500$

B $-10,0001,5003,0003,6006,300$

What are the discounted payback periods of projects A and B$,$ respectively?

a$.$

$2\mathrm{.}76$ years for Project A; $3\mathrm{.}45$ years for Project B$.$

b$.$

$4\mathrm{.}13$ years for Project A; $2\mathrm{.}87$ years for Project B$.$

c$.$

$3\mathrm{.}5$ years for Project A; $3\mathrm{.}86$ years for Project B$.$

d$.$

$3\mathrm{.}90$ years for Project A; $3\mathrm{.}69$ years for Project B$.$

$2.$If the maximal acceptable payback period for this type of projects of $3$ years, which of the following would be the decision of the financial manager, according to the calculated discounted payback period in the previous question?

a$.$

Accept A$,$ reject B

b$.$

Reject both A and B

c$.$

Accept both A and B

d$.$

Accept B$,$ reject A

$3.$Calculate the NPVs of project A and B$.$

a$.$

$1456\mathrm{.}58$ for Project A; $1398\mathrm{.}32$ for Project B

b$.$

$2467\mathrm{.}88$ for Project A; $968\mathrm{.}51$ for Project B

c$.$

$1366\mathrm{.}31$ for Project A; $1449\mathrm{.}39$ for Project B

d$.$

$673\mathrm{.}78$ for Project A; $1534\mathrm{.}86$ for Project B

$4.$Which project would be accepted based on the NPV criterion?

a$.$

Accept B; reject A$.$

b$.$

Accept A; reject B$.$

c$.$

Reject both A and B$.$

d$.$

Accept both A and B$.$

$5.$Calculate the IRRs of both projects.

a$.$

$9\mathrm{.}08\%$ for Project A; $9\mathrm{.}78\%$ for Project B

b$.$

$23\mathrm{.}08\%$ for Project A; $15\mathrm{.}24\%$ for Project B

c$.$

$34\mathrm{.}86\%$ for Project A; $24\mathrm{.}87\%$ for Project B

d$.$

$13\mathrm{.}49\%$ for Project A; $13\mathrm{.}14\%$ for Project B

$6.$Which project would be accepted based on the IRR criterion?

a$.$

Accept A; reject B

b$.$

Reject both A and B

c$.$

Accept B; reject A

d$.$

Accept both A and B

$7.$Suppose the cash flows generated from the projects can be reinvested at the minimum required rate of return $8\%.$ Calculate the modified IRR for the two projects.

a$.$

$10\mathrm{.}80\%$ for Project A; $13\mathrm{.}89\%$ for Project B$.$

b$.$

$20\mathrm{.}80\%$ for Project A; $18\mathrm{.}96\%$ for Project B$.$

c$.$

$9\mathrm{.}59\%$ for Project A; $7\mathrm{.}86\%$ for Project B$.$

d$.$

$11\mathrm{.}34\%$ for Project A; $10\mathrm{.}45\%$ for Project B$.$

$8.$Calculate the equivalent annual costs $($EAC$)$ of both projects.

a$.$

$45\mathrm{.}26$ for project A; $67\mathrm{.}76$ for project B

b$.$

$342\mathrm{.}20$ for project A; $437\mathrm{.}60$ for project B

c$.$

$345\mathrm{.}26$ for project A; $537\mathrm{.}76$ for project B

d$.$

$845\mathrm{.}65$ for project A; $737\mathrm{.}98$ for project B

$9.$Which of the following is TRUE regarding selection of criteria?

a$.$

A decision$-$making between the two projects solely based on NPV is not appropriate due to the different horizons.

b$.$

A decision$-$making between the two projects based on NPV is appropriate because the NPV is a dominant criterion.

c$.$

A decision$-$making between the two projects based on NPV is appropriate because we would make a consistent decisison with both NPV and IRR.

d$.$

A decision$-$making between the two projects based on NPV is more appropriate when there is a divergence between NPV and IRR.

$10.$Which following should be an appropriate decision made by the financial manager, considering the possibility of reinvesting cash flows generated from the project at a minimum required return of $8\%$ and the different horizons of the projects?

a$.$

She would accept A and reject B based on the IRR criterion.

b$.$

She would accept project B and reject A$,$ given both MIRR and EAC of project B are higher than those of project A$.$

c$.$

Unable to make decision due to inconsistent investment criteria.

d$.$

She would reject both A and B due to inconsistent investment criteria.