Question 1 (i) A firm is considering two mutually exclusive one-year projects, with the cash flows...

 

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Question 1 (i) A firm is considering two mutually exclusive one-year projects, with the cash flows shown below. The cost of capital for both projects is 12%. a) Compute the NPV and IRR for each project (15 marks) b) Indicate whether NPV or IRR should be used to choose one of the two projects. (10 marks) Project A Project B Cash flow (CF) at year 0 -1,000 -8,000 Cash flow (CF) at year 1 1,200 9,200 (ii) Do you agree with the following statement and justify your answer. (10 marks) "Managers have the same incentive as shareholders to maximize firm value". (iii) Do you think the following statement to be consistent with the efficient market hypothesis? Please also justify your answer. (15 marks) "The directors of Lotus, the Norfolk-based sports car and engineering group, were able to make abnormal returns on the company's shares just before a public announcement by the company on the results of the new pilot project designed to improve security on its latest models." Question 1 (i) A firm is considering two mutually exclusive one-year projects, with the cash flows shown below. The cost of capital for both projects is 12%. a) Compute the NPV and IRR for each project (15 marks) b) Indicate whether NPV or IRR should be used to choose one of the two projects. (10 marks) Project A Project B Cash flow (CF) at year 0 -1,000 -8,000 Cash flow (CF) at year 1 1,200 9,200 (ii) Do you agree with the following statement and justify your answer. (10 marks) "Managers have the same incentive as shareholders to maximize firm value". (iii) Do you think the following statement to be consistent with the efficient market hypothesis? Please also justify your answer. (15 marks) "The directors of Lotus, the Norfolk-based sports car and engineering group, were able to make abnormal returns on the company's shares just before a public announcement by the company on the results of the new pilot project designed to improve security on its latest models."

Answer rating: 100% (QA)

i a NPV of project A 10001200112 7143 NPV of project B 80009200112 21429 IRR r A of project A is giv... View the full answer