Question 1) You are considering two independent projects, Project A and Project B. The initial cash outlay associated with project A is $ 50,000, and the initial cash outlay associated with project B is $ 70,000. The required rate of return on both projects is 12%. The expected annual free cash inflows from each project are as follows:
Project A Project B
Initial outlay - $ 50,000 - $ 70,000
Inflow year 1 12,000 13,000
Inflow year 2 12,000 13,000
Inflow year 3 12,000 13,000
Inflow year 4 12,000 13,000
Inflow year 5 12,000 13,000
Inflow year 6 12,000 13,000
Calulate the NPV, PI, and IRR for each project and indicate if the project should be accepted.
Question 2) The State Spartan Corporation is considering two mutually exclusive projects. The free cash flows associated with those projects as follows:
Project A Project B
Initial Outlay - $50,000 -$50,000
Inflow year 1 15,625 0
Inflow year 2 15,625 0
Inflow year 3 15,625 0
Inflow year 4 15,625 0
Inflow year 5 15,625 0
The required rate of return on these projects is 10 percent.
A) What is each project's payback period?
B) What is each project's NPV?
C) What is each project's IRR?
D) What has caused the ranking conflict?
E) Which project should be accepted? Why?