Suppose you work for a technology company, and you are considering two independent phone projects, with the
Question:
Suppose you work for a technology company, and you are considering two independent phone projects, with the following cash flows. The required return for both is 8 percent.
(1 ) Calculate both NPVs and decide if you should accept project A, project B, both projects, or neither project:
Year | iPhone A |
iPhone B |
0 | $-999,000 | $-110,000 |
1 | $380,000 | $49,000 |
2 | $450,000 | $52,000 |
3 | $550,000 | $51,000 |
(2) Calculate the discounted payback period for project A and project B. Should you accept project A, project B, both projects, or neither project? Is it consistent with the conclusion in part (1)?
(3) Based on your conclusion part from (1) and (2), do you think the IRR for project A and project B will be greater or smaller than the required return?
(4) When will a project have multiple IRRs? In that case, can we still use the IRR rule to make investment decisions?
Expert Answer:
1 To determine whether to accept project A project B both projects or neither project we need to calculate the Net Present Value NPV for each project ... View the full answer
