A.1

Suppose you have the following two mutually exclusive projects that you can carry out on the corner of 39th Street and Walnut Street: Build a daycare center or a health spa.

Suppose the day care center has the following cash flows: An immediate cash outlay of $5,000 followed by inflows of $2500 in each of the next 3 years and zero thereafter.

Suppose the health spa has the following cash flows: An immediate outlay of $5000 followed by inflows of nothing in year one, $1000 in year 2 and $7100 in year 3 and zero thereafter.

1. If you base your investment decision on which investment has the highest NPV, which do you choose when the discount rate is 15%?

a. Health Spa

b. Day Care

A.2

Suppose you have the following two mutually exclusive projects that you can carry out on the corner of 39th Street and Walnut Street: Build a daycare center or a health spa.

Suppose the day care center has the following cash flows: An immediate cash outlay of $5,000 followed by inflows of $2500 in each of the next 3 years and zero thereafter.

Suppose the health spa has the following cash flows: An immediate outlay of $5000 followed by inflows of nothing in year one, $1000 in year 2 and $7100 in year 3 and zero thereafter.

Is the IRR for the health spa lower or higher than the IRR for the day care project?

A. IRR for the health spa is LOWER than the IRR for the day care project

B. IRR for the health spa is HIGHER than the IRR for the day care project