NPV Practice: 1. You have two possible projects with a cost of capital of 8% and the following expected cash flows:

Expected Net Cash Flows

Year Franchise L Franchise S

0 ($100) ($100)

1 10 70

2 60 50 3 80 20

What is the NPV of each project? According to NPV, which project would you choose if they are mutually exclusive?

What is each projects IRR? According to IRR, which project would you choose?

What is each projects Modified IRR? If you use Modified IRR as your decision rule, which do you choose? Does this mirror the previous decision based on NPV or IRR?

What is the Profitability Index for each project?

What is the payback period for each project? What is the discounted payback for each project?

** For each method above, consider the pros and cons of the method used for project decision-making.

2. You have two projects with a 10% cost of capital with the following expected CFs:

Expected Net Cash Flows

Year Project T Project F

0 ($100,000) ($100,000)

1 60,000 33,500

2 60,000 33,500

3 33,500

4 33,500

What is each projects NPV without replication?

What is each projects equivalent annuity?