You have been asked to evaluate two projects. Both projects have an initial cost of $20,000. Projected after-tax cash flows are as follows: Project A Project B Year 0 -$20,000 -$20,000 Year 1 7,000 11,000 Year 2 9,000 9,000 Year 3 11,000 7,000 The company uses a hurdle rate of 15% in its capital budgeting.

1. Calculate the undiscounted Payback Period for Project A (two decimals).

2. Calculate the Net Present Value and Internal Rate of Return (IRR) for Project A. You must indicate the measure you are calculating, e.g. dollars, percent, ratio, etc.) (2 decimals)

3. Calculate the Profitability Index for Project A

4. Your boss knows how to interpret the result of the IRR calculation, but is not sure what your number really means and how it is calculated. Clearly explain what the Internal Rate of Return is.