Consider the following two mutually exclusive projects: Page 334 Whichever project you choose, if any, you require a 15% return on your investment. 18. NPV and Discount Rates (LO1) An investment has an installed cost of $684,680. The cash flows over the four-year life of the investment are projected to be $263,279, $294,060, $227,604, and $174,356. If the discount rate is zero, what is the NPV? If the discount rate is infinite, what is the NPV? At what discount rate is the NPV just equal to zero? Sketch the NPV profile for this investment based on these three points. Intermediate (Questions 1920) 19. NPV and the Profitability Index (LO6) If we define the NPV index as the ratio of NPV to cost, what is the relationship between this index and the profitability index? 20. Cash Flow Intuition (LO1, 7) A project has an initial cost of I, has a required return of R, Year Cash Flow (I) Cash Flow (II) 1 31,000 9,700 2 31,000 9,700 3 31,000 9,700 a. If the required return is 10% and the company applies the profitability index decision rule, which project should the firm accept? b. If the company applies the NPV decision rule, which project should it take? c. Explain why your answers in (a) and (b) are different. Year Cash Flow (A) Cash Flow (B) 0 $350,000 $50,000 1 45,000 24,000 2 65,000 22,000 3 65,000 19,500 4 440,000 14,600 a. If you apply the payback criterion, which investment will you choose? Why? b. If you apply the discounted payback criterion, which investment will you choose? Why? c. If you apply the NPV criterion, which investment will you choose? Why? d. If you apply the IRR criterion, which investment will you choose? Why? e. If you apply the profitability index criterion, which investment will you choose? Why? f. Based on your answers in (a) through (e), which project will you finally choose? Why?