If the opportunity cost of capital is 11%, and you have unlimited access to the capital,
which one(s) would you accept? What would be your action if the cost of capital is 16%?
b. Suppose that you have limited access to the capital and you need to choose only one
project. Which one would you choose? The discount rate is still 11%.
c. What is the payback period of each project? Please analyse if in general decision based
on payback is consistent with decision based on NPV.
d. What are the internal rates of return (IRR) on the three projects? Does the IRR rule in this
case give the same decision as NPV?
e. If the opportunity cost of capital is 11%, what is the profitability index for each project?
Please analyse if in general decisions based on profitability index is consistent with
decisions based on NPV.
f. What is the most generally accepted measure to choose between the projects? Please
justify your answer.
Please explain answer in detail and provide in-text citations.

Transcribed Image Text:

Project A B с Co -5,000 -1,000 -5,000 C₁ +1,000 0 +1,000 Cash Flows ($) Cz +1,000 + 1,000 +1,000 C3 +3,000 +2,000 +3,000 СА 0 +3,000 +5,000 Project A B с Co -5,000 -1,000 -5,000 C₁ +1,000 0 +1,000 Cash Flows ($) Cz +1,000 + 1,000 +1,000 C3 +3,000 +2,000 +3,000 СА 0 +3,000 +5,000

Answer rating: 100% (QA)

Answer a at 11 the company should select Projects B and C because they have positive NPV IRR higher ... View the full answer