Corporate Finance

3. Considering the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$750,000 -$75,000 1 105,000 70,000 2 175,000 15,000 3 250,000 10,000 4 545,000 2,000 Whichever project you choose, if any, you require a 9 percent return on your investment. 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? g. Calculate the crossover rate. Why is there a conflict between project A and project B (explain in terms of crossover rate)? 4. Noah Industrial, Inc. is considering a new project. The project will require $800,000 for new fixed assets. There is a total of $6,000 combined increase in inventories and account receivables and $2,000 increase in account payables. The project has a 6-year life. The fixed assets will be depreciated using 5-year MACRS to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 4 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of 9,500 units and the selling price per unit is $250 while the variable cost per unit is expected to be $160. Annual fixed costs are expected to be $30,000. The tax rate is 35 percent and the required rate of return (cost of capital) is 13 percent. Calculate the project's initial investment costs, annual operating cash flows and terminal cash flows. What are project's NPV and IRR