1. Using what you have learned in the lecture notes and having just analyzed each of the projects using the four key capital budgeting techniques, describe the reinvestment assumptions for each of the methods. (4 pts) Hint, the reinvestment rate assumptions have to do with how (if) the cash flows are discounted during analysis.
2. NPV
3. IRR
4. Profitability Index (PI)
5. Payback period

2. How would a change in the required rate of return affect the projects calculated internal rate of return (IRR)? Explain. Would the accept/reject decision change using the IRR analysis method? Explain. (2 pts)

3.Think about changes that happen in a project once it has been accepted and moving forward. Here are 3 potential scenarios. For each, describe what you expect to happen to a project's expected NPV, and WHY that is your expectation. (2 pts for each of the following).

As MBA students, just being able to calculate NPV isnt sufficient. You should be able to consider what the effects of various market or project changes on the projects viability.

LOOK AT EACH SITUATION INDIVIDUALLY AND ASSUME THAT THERE ARE NO OTHER CHANGES FOR THE FIRM.

1. Your firm has a project with higher risk than your firms regular project. The project has been tentatively accepted for development, assuming a required rate of return of 12%. That required rate of return was estimated one year ago, before the FED began its interest rate hikes. The risk free rate has increased by 2% from that used in the original projection.

a. Your firm's technology has become dated and will require an upgrade in order for the project to continue, this will require a 10% increase in operating costs for the remaining life of the project.

b. Due to recent changes in EPA water quality regulations in Congress, the final cleanup and remediation costs for a project have dropped by 20%.

2. Your firm is looking at two mutually exclusive projects (be sure you know what this means, as compared to independent projects). Project A has an NPV of $1,235,000 and an IRR of 14.3%. Project B has an NPV of $1,350,000 and an IRR of 13.8%. Your firm's required rate of return is 13.2%. Which of these mutually exclusive projects would you accept (either, both, or one particular project -- be specific, it matters). WHY is that your decision? (2 pts) The lecture notes cover this one, review as needed. (2 pts)