1. Maxwell
Long term Investment Decisions
Software Inc. has the following mutually
exclusive projects
Ycar Projcct
Project
-$20,000 -$24,000
B
2
3
13,200
14,100
8,300
3,200
9,800
7,600
a. Suppose the company's payback period cut off is 2
be chosen?
years. Which of these two projects should
D. Suppose the company uses the NPV rule to rank these two projects. Which
project should be
chosen if the appropriate discount rate is 15%?
2. Discounted payback An investment project has aunual cash inflows of $5,000, $5,500, $6,000
and $7,000, and a discount rate of 129%. What is the discounted payback period for these cash
flows if the initial cost is $8.0002 What if the initial cost is $12,000? What if it is $16,000?
3. Hanmani group, a consumer electronics conglomerate is reviewing its annual budget in
wireless technology. It considers three investment opportunities. The cash flows of three
investment opportunities arc given below: Assume discount rate is 12%
Year
CDMA
WIFI
G4
0
(S16,000)
($24,000)
(S40,000)
1
22,000
20,000
36,000
15,000
50,000
64,000
5,000
40,000
40,000
a. Based on NPV rule rank these investments
Basedon Profitability Index decision rule, rank these investments
c.Based on your findings in NPV and PI decisions, which project would you
recommend to the CE)
of the company
4.You work for afirm that has limited access to capital markets. As aconsequence, it has only S20
million available for new investments this year. The firm does have a ready supply of good
projects, and you have listed all the projects.
Project
II
IV
Initial Investment
$10 million
NPV
5 million
10million
2.5 million
4 million
4million
5 million
2million
15million
$3million
IRR
21%
28%
19%
24%
20%
would you take?
a. Based on the profitability index, which of these projects
b. Based on the IRR, which of these projects would you take?
answers?
Why might the two approáches give you different
c.