Question 9

(a) Better Times Limited has two mutually exclusive projects, A and B. The company is considering which one is a better option if the shareholders require a return of 12%. The cash flows from the two projects are provided in the table below

Year	Project A	Project B
0	-100,000	-100,000
1	30,000	49,000
2	50,000	49,000
3	70,000	49,000

Using the following investment appraisal methods, advise the company on which project to choose

1. Net Present Value (NPV),
2. Profitability Index (PI)

Question 10

A). Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9% and required payback is 4 years.

1. What is the payback period?
2. What is the NPV?
3. What is the PI?
4. Should we accept the project?
5. What decision rule should be the primary decision method?

B). you are looking at a new project and you have estimated the following cash flows:

Year 0: CF = -165,000

Year 1: NI = 13,620

Year 2: NI = 3,300

Year 3: NI = 29,100.

Average Book Value = 72,000. Assume we require an average accounting return of 25%. Do we accept or reject the project?

Question 11

a). Barclays bank imposes a payback cutoff of three years for its international investment projects. If the bank has the following two projects available, should it accept either of them?

YEAR CASH FLOW (A) CASH FLOW (B)

0 -$50,000 -$70,000

1 35,000 15,000

2 21,000 22,000

3 10,000 31,000

4 5,000 240,000

b) You are trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $18 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,632,000, $2,106,500, $1,941,700, and $1,298,000 over these four years, what is the projects average accounting return (AAR)?

Question 12

Consider the following two mutually exclusive projects:

YEAR CASH FLOW (A) CASH FLOW (B)

0 -$350,000 -$35,000

1 25,000 17,000

2 70,000 11,000

3 70,000 17,000

4 430,000 11,000

Whichever project you choose, if any, you require a 15 percent return on your investment.

1. If you apply the payback criterion, which investment will you choose? Why?
2. If you apply the NPV criterion, which investment will you choose? Why?
3. If you apply the profitability index criterion, which investment will you choose? Why?
4. Based on your answers in (a) through (c), which project will you finally choose? Why?