Year A B
0 -400,000 -600,000
1 55,000 300,000
2 55,000 300,000
3 55,000 50,000
4 225,000 50,000
5 225,000 50,000
A. Which project would you select if you used the discounted payback method, NPV and IRR methods and explain why? The discount rate is 10%.
B. Following up on A, what is the cross-over rate? Explain the significance of this rate. Draw a graph to show the relationship between NPV and IRR. Include the intercepts and the cross-over rate.
C. Instead of $50,000 in years 3, 4 and 5, what equal payments in years 3, 4 and 5 will make the NPV of project B equal to the NPV of project A
D. Explain some of the weaknesses of the IRR method over the NPV method.