As a student intern, you are asked to determine whether either one or both of two projects should be recommended to management. You are informed that the effective annual required rate of return is 10%. Cash flows for the projects are indicated in the table below (in thousands of dollars):

Year 0 1 2 3

A -1,800 600 1,000 1,200

B 12,000 -600 -10,800 -5,000

For the following problems, show all your work (i.e. express al formulas used with values in

place of variables).

a) Consider Project A and Project B as independent projects. Calculate the internal rate of return (IRR) for Project A. Calculate the IRR for the Project B. According to your calculations and the IRR decision criterion, would you recommend Project A, Project B or both? (3 marks)

b) Consider Project A and Project B as mutually exclusive projects. Calculate the PI for the incremental Project A over B. Using the PI decision criterion, what would you recommend? (2 marks)

Answer rating: 100% (QA)

a Consider Project A and Project B as independent projects Calcul ate the internal rate of return IR ... View the full answer