Anwers a through e are worth 10 points each

Consider the following projects with a cost of capital = 14%:

Year Project M Project T?

0 -$250,000 -$320,000

1 150,000 110,000

2 100,000 150,000

3 70,000 170,000

b) What does the NPV specifically measure? What is the NPV for each project? Which

project(s) should be accepted? Can NPV accurately distinguish between mutually exclusive

projects (if so, which project would you choose)? What is the biggest strength of NPV?

c) What does the IRR specifically measure? What is the IRR for each project? Which

project(s) are acceptable based on IRR? Can IRR accurately distinguish between mutually

exclusive projects (if so, which project would you choose)? What is the biggest strength of IRR?

d) What does the Profitability Index specifically measure? What is the PI for each project? Which

project(s) are acceptable based on PI? Can PI accurately distinguish between mutually exclusive

projects (if so, which project would you choose)?

e) At what cost of capital would a firm be indifferent between the two projects based on their NPVs?

What is this WACC rate called? What is the relevant range of discount rates where you would

accept project M and at what discount rates would project T be accepted if they are mutually

exclusive?