Using the following initial cost and cash flow figures below for Projects 1 and 2, please answer the three questions (a, b, and c).

 

                                 Expected Net Cash Flows

 Year                   Project 1                                Project 2

  0                    -$1,000,000                         -$1,000,000

  1                        520,000                                 150,000

  2                        300,000                                 425,000

  3                        280,000                                 800,000

 

Both of the projects have a cost of capital (r) of 11.5 percent (so r = 0.115 in decimal form).

 

a) What is Project 1's net present value (NPV)? Based on your answer for the NPV, should this project be accepted or rejected? Briefly explain.

 

b) Rounding your answer to the second decimal place, what is Project 2's internal rate of return (IRR)? Based on your answer for the IRR, should this project be accepted or rejected? Briefly explain.

 

c) Finally, what is the payback period (in years) for Project 2?

Answer rating: 100% (QA)

a To calculate the net present value NPV of Project 1 we use the formula NPV sum dfracCFt1 rt ight I... View the full answer