FIN501 Week 4 Assignment
1. Consider the following independent projects:
Project
C0
A
-1,000
B
-2,000
C
-3,000
Cash Flow ($)
C1
C2
C3
1,000
0
0
1,000 1,000 1,000
1,000 1,000
0
C4
0
0
1,000
C5
0
0
1,000
a) If the opportunity cost of capital is 8%, calculate the net present
value (NPV) of each project.
b) Based on the NPV calculated in a), which project (s) should a firm
accept? Why?
c) Calculate the payback period for each project.
d) Which project(s) would a firm using only the payback rule accept if
the cutoff period is three years?
2. The president of Giant Enterprises has to make a choice between two
mutually exclusive investments:
Project
S
L
Cash Flow ($
thousands)
C0
C1
C2
-42
30
28
-56
40
36
IRR
(%)
24.83
23.49
The opportunity cost of capital is 12%. He is tempted to take Project S,
which has the higher IRR.
a) Explain why this is not the correct procedure.
b) Show him how to adapt the IRR rule to choose the best project.
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3. B Pharmaceuticals has $900,000 allocated for capital expenditures.
Which of the following 7 projects should the company accept to stay
within the $900,000 budget? How much does the budget limit cost the
company in terms of its market value? The opportunity cost of capital
for each project is 11 percent.
Project Investment($thousands) NPV($thousands) IRR (%)
1
300
66
17.2
2
200
-4
10.7
3
100
14
12.1
4
250
43
16.6
5
100
7
11.8
6
350
63
18
7
400
48
13.5
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