Problems:

Consider two mutually exclusive projects with the following cash flows:

Project	C/F0	C/F1	C/F2	C/F3	C/F4	C/F5	C/F6
A	$(41,215)	$12,500	$14,000	$16,500	$18,000	$20,000	N/A
B	$(46,775)	$15,000	$15,000	$15,000	$15,000	$15,000	$15,000

1. Assuming that the discount rate for project A is 16% and the discount rate for B is 15%, then given that these are mutually exclusive projects, which project would you take and why?

Consider the following list of projects:

Project	Investment	NPV
A	135,000	6,000
B	200,000	30,000
C	125,000	20,000
D	150,000	2,000
E	175,000	10,000
F	75,000	10,000
G	80,000	9,000
H	200,000	20,000
I	50,000	4,000

2. Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which projects should you invest in and in what order?

a. CBFH

b. CBGF

c. BCFG

d. CBFG

3. Which of the following statements is FALSE?

a. Because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project.

b. Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis.

c. Overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation.

d. When computing the incremental earnings of an investment decision, we should include all changes between the firm's earnings with the project versus without the project.

4. Which of the following statements is FALSE?

a. Many projects use a resource that the company already owns.

b. When evaluating a capital budgeting decision, we generally include interest expense.

c. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project.

d. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.