Question: Consider two mutually exclusive projects that a firm is exploring. The discount rate is 15%. Year Project X Project Y Project Y-X 0 -$1,030,000 -$1,725,000
Consider two mutually exclusive projects that a firm is exploring. The discount rate is 15%.
| Year | Project X | Project Y | Project Y-X |
| 0 | -$1,030,000 | -$1,725,000 | -$695,000 |
| 1 | $495,000 | $518,000 | $23,000 |
| 2 | $495,000 | $565,000 | $70,000 |
| 3 | $390,000 | $578,000 | $188,000 |
| 4 | $295,000 | $783,000 | $488,000 |
| 5 | $203,000 | $762,000 | $559,000 |
- Which project should be chosen based on the NPV rule?
- Based on the payback period, which project should be chosen? Is the answer consistent with the one based on the NPV rule? If not, what is the problem?
- Based on the profitability index, which project should be chosen? Is the answer consistent with the one based on the NPV rule? If not, what is the problem?
- Based on the IRR, which project should be chosen? Is the answer consistent with the one based on the NPV rule? If not, what is the problem?
- Compute the NPV, PI, and IRR for the incremental cash flows of project B relative to project A. Do they provide the same answer now?
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