Question: Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -365,000 -40,000 1 38,000 20,300 2 47,000 15,200 3 62,000

Consider the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)

0 -365,000 -40,000

1 38,000 20,300

2 47,000 15,200

3 62,000 14,100

4 455,000 11,200

  • Whichever project you choose, if any, you require a return of 13 percent on

  • your investment.

    • If you apply the payback criterion, which investment will you choose? Why?

    • If you apply the NPV criterion, which investment will you choose? Why?

    • If you apply the IRR criterion, which investment will you choose? Why?

    • If you apply the profitability index criterion, which investment will you choose? Why?

    • Based on your answers in (a) through (d), which project will you finally choose? Why?

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