Investment criteria

Problem Set

BCOR$3410$

Learning Objectives

Calculate the NPV$,$ payback period, discounted payback period, IRR,

Incremental IRR or I$-$IRR

Problem $1$

Consider the following two mutually exclusive projects:

Whichever project you choose, if any, you require a $10\%$ 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 incorrectly apply the IRR criteria $($not I$-$IRR$),$ which investment will you

choose? If you correctly apply the Incremental IRR or I$-$IRR criteria, which

investment will you choose? Why?

E$.$ Based on your answers in $($A$)$ through $($D$),$ which project will you finally choose?

Why?