Problem 1) Your author offers four alternatives to the NPV rule. List and discuss these four alternatives.
Problem 2) When two mutually exclusive projects give conflicting acceptance indicators, how should the manager resolve the conflict?
Problem 3) Two projects have the expected cash flows shown below. The projects have similar risk characteristics and their cost of capital is 6 percent.
End of Year Project A Project B
Now (10,000,000) (8,000,000)
1 7,000,000 3,000,000
2 3,000,000 1,500,000
3 3,500,000 1,500,000
4 3,000,000 500,000
a) Calculate the payback period for each project.
b) Calculate the internal rate of return of each project. Which project should be accepted if they are independent? If they are mutually exclusive? (HINT - USE EXCELL)
c) Calculate the profitability index of each project. Which project should be accepted if they are independent? If they are mutually exclusive?
Problem 4) Why do many managers prefer to use the IRR rather than the NPV?