For the following two projects, determine the

Payback Period

Discounted Payback

Net Present Value

Profitability Index $($Benefit$-$Cost Ratio$)$

Internal Rate of Return

Modified Internal Rate of Return

Project A

Project B

Year

Net Income

Cash Flow

Net Income

Cash Flow

$0$

$(10,000)$

$(10,000)$

$1$

$7,000$

$9,000$

$1,000$

$2,000$

$2$

$1,000$

$2,000$

$9,000$

$10,000$

Note that Project A is a Below Average risk project while Project B is of Above Average risk.

Assume your firm is in the $40\%$ tax bracket, and that your cost of capital is $9\%.$

The firm adjusts its projects with risk adjusted discount rates to account for project risks.

The risk schedule applied is as follows:

Risk Class

Description

RADR

Below Average

Less than Firm Average Risk

$8\%$

Average

Risk equal to Firm Average Risk

$9\%$

Above Average

Higher than Normal but not excessive risk

$10\%$

Highest risk

Extremely high risk

$155$