M1.Q2:

You must pick between two mutually exclusive projects (A and B), with the cash flows and discount rate provided to you on tab M1.Q2.

1. Compute NPV, IRR and EAC for each project and identify which project would be picked under each criterion. Pick the best decision rule and identify what project would you pick between A and B.
2. Using a data table, analyze how the NPV of each project changes in response to changes in the discount rate. Draw the NPV profiles of the two projects on the same graph (make sure your graph has a title, your axis are titled, and identify your data series as Project A and Project B).
3. Figure out for what discount rate you would be indifferent between the two projects (i.e., the discount rate for which the two projects have the same NPV).
4. Assume that you decided to pick Project B, but you are dealing with a limited budget. You now are comparing project B with two other projects (X and Y) rank this projects in order of preference based on a decision rule that takes into account your limited budget (make sure that the project you would pick gets rank 1).

CES FOR MUTUALLY EXCLUSIVE PROJECTS Year Project A Project B -350,000 -100000 2,500,000 30000 -3,000,000 20000 500,000 20000 500,000 20000 500,000 20000 500,000 20000 -14,000,000 45000 3,500,000 20000 3,500,000 3,500,000 11 3,500,000 3,500,000 3,500,000 Discount rate 10% 04.1: Decision Criteria IRR Project NPV EAC For each criteria, pick Best criteria Project picked based on best criteria 04-2: NPV Profile NPVA NPV B 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 125% 130% 135% 140% 145% 150% 155% 160% 165% 04-3: Where do the two projects cross? (insert as many lines as you need to support your cross-over rate calculations) 04-4: Rank and choose between B, X and Y given a limited budget constraint Discount rate 10% Year Project B Project X -100000 30000 20000 20000 20000 20000 20000 45000 20000 Project Y -50000 -25000 1000 5000 1000 5000 1000 5000 10000 5000 10000 5000 50000 5000 10000 5000 10000 5000 Name of Decision Rule Value of Criteria of Choice Rank