Evaluate Projects with Cash Flows

Question

Your company’s cost of capital is 12%.  You are currently evaluating three projects that have the following cash flow streams:

 

Cash Flows at Time t

Project

0

1

2

3

4

A

-10,000

4,000

4,000

4,000

4,000

B

-10,000

0

0

0

50,000

C

-1,000

500

500

500

500

a)      Find the payback period, discounted payback period, IRR, and NPV for each of the three projects.

b)      Use the payback period to evaluate options A and B.  Which would you choose according to this method?  Why does payback period give the wrong answer?

c)      Suppose projects A and C are mutually exclusive.  Use the IRR to establish which of the two you should undertake.  Why does IRR give the wrong answer?

d)     Determine whether Project A or C should be undertaken using incremental IRR.

 

Summary

The question belongs to Finance and it is about evaluating three projects A, B and C with cash flows. The payback period, discounted payback period, IRR and NPV for each of the projects have been calculated.

Total Word Count 217

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