RATE OF RETURN IS 7%

Consider two mutually exclusive projects with the following expected cash flows and a required rate of return of [depends on the last digit of student ID*] percent.

* If the last digit of your student ID is an odd number (for example XXXXXX3), the required rate of return is 7%.

If the last digit of your student ID is an even number (including 0) (for example XXXXXX0 or XXXXXX2), the required rate of return is 8.5%.

	Cash Flows
Year	Project S	Project L
0	-7,000	-30,000
1	3,000	12,000
2	6,000	12,000
3	5,000	30,000

(a) If you apply the payback criterion, which project will you choose? Why? (2 marks)

(b) If you apply the NPV criterion, which project will you choose? Why? (4 marks)

(c) If you apply the profitability index criterion, which project will you choose? Why? (2 marks)

(d) Based on your answers in (a) to (c), which project will you finally choose? Why? (2 marks)