Problem:
Consider the following two mutually exclusive projects:
Whichever project you choose, if any, you require a 15% return on your investment.
a) If you apply the payback criterion, which investment will you choose? Why?
b) If you apply the NPV criterion, which investment will you choose? Why?
c) If you apply the IRR criterion, which investment will you choose? Why?
d) If you apply the profitability index criterion, investment will you choose? Why?
e) Based on your answers in (a) through (d), which project will you finally choose? Why?
| Year |
Cash Flow (A) |
Cash Flow (B) |
| 0 |
-170,000 |
-18,000 |
| 1 |
10,000 |
10,000 |
| 2 |
25,000 |
6,000 |
| 3 |
25,000 |
10,000 |
| 4 |
380,000 |
8,000 |