Problem 1: Calculating Payback. Offshore Drilling Products. Inc.. imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?
Year Cash Flow (A) Cash Flow (B)
0 -538.000 -5 70.000
1 16,000 10,000
2 19,000 15,000
3 18.000 20.000
4 5,000 250,000
Problem 2: Comparing Investment Criteria, Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0 -$210,000 -520.000
1 15.000 12.000
2 30,000 10,500
3 32,000 9.500
4 425.000 8.200
Whichever project you choose, if any, you require a 15 percent 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, which investment will you choose? Why?
e. Based on your answers in (a) through (d), which project will you finally choose? Why?