Consider the following two projects:

Cash Flow	Project A	Project B
C0	-$120	-$120
C1	48	60
C2	48	60
C3	48	60
C4	48	60
C5	48

a.If the opportunity cost of capital is 7%, which of these two projects would you accept (A, B, or both)?

Which projects would you accept?

0 Project A

0 Project B

0 Both

b.Suppose that you can choose only one of these two projects. Which would you choose? The discount rate is still 7%.

Which project would you choose?

0 Project A

0 Project B

c.Which one would you choose if the cost of capital is 12%?

Which project would you choose?

0 Project A

0 Project B

d.What is the payback period of each project?

	Project A	Project B
Payback Period	0 Year 1 0 Year 2 0 Year 3 0 Year 4	0 Year 1 0 Year 2 0 Year 3 0 Year 4

e.Is the project with the shortest payback period also the one with the highest NPV?

Shortest Payback would also mean highest NPV:

0 Yes

0 No

f.What are the internal rates of return on the two projects?

	Project A	Project B
IRR	_________%	___________%

g.Does the IRR rule in this case give the same answer as NPV?

If Cost of Capital is less than Cross-Over Rate	0Yes 0 No
If Cost of Capital is Equal to or Greater than Cross-Over Rate	0Yes 0 No

h-1.If the opportunity cost of capital is 7%, what is the profitability index for each project?(Round your answers to 2 decimal places.)

	Project A	Project B
Profitability Index

h-2.Is the project with the highest profitability index also the one with the highest NPV?

Highest Profitability Index would also mean highest NPV

0 Yes 0 No

h-3.Which measure should you use to choose between the projects?

If capital is rationed	0 NPV 0 Profitability Index
If capital is not rationed	0 NPV 0 Profitability Index