5. Two projects being considered are mutually exclusive and have the following projected cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$50,000 -$50,000

1 15,625 0

2 15,625 0

3 15,625 0

4 15,625 0

5 15,625 99,500

If the required rate of return on these projects is 10 percent, which would be chosen and why?

a. Project B because it has the higher NPV.

b. Project B because it has the higher IRR.

c. Project A because it has the higher NPV.

d. Project A because it has the higher IRR.

e. Neither, because both have IRRs less than the cost of capital.

6. The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm's cost of capital is 14 percent and its tax rate is 40 percent, what is the project's IRR?

a. 8%

b. 14%

c. 18%

d. -5%

e. 12%

7. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year for 20 years. Find the internal rate of return to the nearest whole percentage point.

a. 9%

b. 7%

c. 5%

d. 3%

e. 11%

8. Oak Furnishings is considering a project that has an up-front cost and a series of positive cash flows. The project's estimated cash flows are summarized below:

Project

Year Cash Flow

0 ?

1 $500 million

2 300 million

3 400 million

4 600 million

The project has a regular payback of 2.25 years. What is the project's internal rate of return (IRR)?

a. 23.1%

b. 143.9%

c. 17.7%

d. 33.5%

e. 41.0%