There are two independent investment projects for the Galactic Empire. Project A (build TIE Fighters) costs the Empire $300,000 to set up, and it will provide annual cash inflows of $70,000 for 7 years. Project B (build Death Star) costs the Empire $1,000,000 to set up, and it will provide annual cash inflows of $255,000 for 6 years. The Empire’s cost of capital (i.e., the required return on investment) is 10% annually, and the Empire requires the initial investments in those projects be fully paid back within 4 years, or it will be running out of money by then.
1. Based on the NPV rule, what project(s) should the Empire accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.
2. Based on the IRR rule, what project(s) should the Empire accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.
3. Based on the Payback rule, what project(s) should the Empire accept?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.
4. What project(s) should the Empire finally choose?
a. Project A only.
b. Project B only.
c. Both Projects A and B.
d. Neither Project A or B.